By Randall B. Weill

            On May 18, 2005, the IRS announced that employers who offer flexible spending arrangements (FSAs) to their employees will be permitted to extend the deadline for reimbursement of health and dependent care expenses for up to two and half months after the end of the plan year.  Previously, employees were required to “use-it-or-lose” FSA funds by the end of the plan year. 

            In order to take advantage of this rule, employers must amend their plan document. The grace period cannot extend beyond the fifteenth day of the third calendar month after the end of the immediately preceding plan year.  For example, for plan years beginning on January 1, 2006, the grace period could extend to March 15, 2007. The new grace period can even apply to the current plan year. However, employers will have to amend the plan before the end of the current plan year. 

            When the plan has been properly amended to allow for this extension of the “use-it-or-lose it” rule, unused benefits or contributions from the immediately preceding plan year can be used to reimburse eligible expenses during the grace period.  Although there can be a “run out” period for the submission of claims for expenses incurred during the grace period, any amounts from the preceding plan year that remain unused after the expiration of the grace period will be forfeited to the plan.  Unused benefits or contributions cannot be used for other purposes. For example, unused amounts that were designated to pay or reimburse medical expenses cannot be used to pay or reimburse dependent care expenses. Of course, if there are no unused FSA amounts remaining at the end of the plan year or if unused funds are used up during the grace period, eligible FSA expenses can still be paid or reimbursed from the FSA account balance for the new plan year so long as these expenses were incurred in that new plan year.