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Can You Rollover FSA Funds? Navigating the Flexible Spending Account Landscape

The short answer, in most cases, is no, you cannot directly rollover unused funds from your Flexible Spending Account (FSA) into the next plan year. The “use-it-or-lose-it” rule has historically governed FSAs. However, there are exceptions and nuances that require careful consideration. Let’s delve into the complexities of FSA rollovers, exploring the exceptions and alternatives that could allow you to retain some of your hard-earned healthcare dollars.

Understanding the FSA Landscape

Before exploring rollover options, it’s crucial to grasp the core principles of a Flexible Spending Account (FSA). FSAs are employer-sponsored, pre-tax benefit plans designed to help employees set aside money for qualified healthcare expenses. Contributions are deducted from your paycheck before taxes, reducing your taxable income and allowing you to pay for eligible expenses tax-free. These expenses typically include medical, dental, and vision care copayments, deductibles, prescriptions, and certain over-the-counter items.

The defining characteristic of a traditional FSA has always been the “use-it-or-lose-it” rule. This means that any funds remaining in your account at the end of the plan year are forfeited. This stipulation encourages participants to carefully estimate their annual healthcare expenses and spend their FSA funds wisely.

The Rollover and Grace Period Exceptions

While the “use-it-or-lose-it” rule remains the standard, some employers offer exceptions to help employees retain a portion of their unused FSA funds. These exceptions come in two primary forms: rollovers and grace periods.

FSA Rollover Option

The rollover option, when offered by your employer, allows you to rollover a certain amount of unused FSA funds (up to a specified limit) into the following plan year. This is a valuable benefit that can help alleviate the pressure to spend down your entire FSA balance before the deadline.

However, it’s important to note that the maximum rollover amount is capped. The IRS sets an annual limit on the amount that can be rolled over. For example, in 2024, the maximum rollover amount is $640. If you have more than that amount left in your FSA at the end of the year, you will still forfeit the excess.

Key Takeaway: Check with your employer to see if they offer the rollover option and what the specific rollover limit is.

FSA Grace Period

The grace period is another alternative offered by some employers. Instead of rolling over funds, the grace period provides you with an additional 2.5 months after the end of the plan year to incur eligible healthcare expenses and use your remaining FSA funds.

For instance, if your FSA plan year ends on December 31st, a grace period would allow you to submit claims for eligible expenses incurred through March 15th of the following year.

Important Distinction: An employer can offer either a rollover or a grace period, but not both.

Choosing Between a Rollover and a Grace Period

If your employer offers a choice between a rollover and a grace period (though rare), consider your spending habits and anticipated healthcare needs.

Rollover: This is generally better if you consistently underestimate your healthcare expenses and are comfortable with a smaller, guaranteed amount being carried over.
Grace Period: This is beneficial if you tend to have unpredictable healthcare expenses and prefer a longer window to incur eligible expenses.

Maximizing Your FSA Benefits

Regardless of whether your employer offers a rollover or grace period, the best strategy is always to accurately estimate your healthcare expenses and spend your FSA funds wisely. Here are some tips:

Track your healthcare expenses: Keep a record of all medical, dental, and vision expenses throughout the year.
Plan for upcoming expenses: Consider scheduled appointments, procedures, and anticipated prescription refills.
Utilize eligible over-the-counter items: Stock up on eligible over-the-counter medications, first-aid supplies, and other healthcare products.
Check your FSA balance regularly: Monitor your account balance to ensure you’re on track to spend your funds.

Frequently Asked Questions (FAQs) About FSA Rollovers

Here are some frequently asked questions about FSA rollovers to help you navigate the complexities of these accounts:

1. What happens if I don’t use my FSA funds by the deadline?

If you don’t use your FSA funds by the end of the plan year (or the end of the grace period, if applicable), and your employer doesn’t offer a rollover, you will forfeit the remaining funds. This is the “use-it-or-lose-it” rule in action.

2. Does the rollover option affect my contribution limit for the following year?

No, the rollover option does not affect your contribution limit for the following year. You can still contribute up to the IRS-mandated maximum, regardless of any rolled-over funds.

3. Can I rollover funds from a Dependent Care FSA?

No, the rollover and grace period rules generally apply only to healthcare FSAs, not Dependent Care FSAs. Dependent Care FSAs are still subject to the strict “use-it-or-lose-it” rule.

4. What expenses are eligible for reimbursement with my FSA funds?

Eligible expenses typically include medical, dental, and vision care copayments, deductibles, prescriptions, and certain over-the-counter items. A comprehensive list of eligible expenses can be found on the IRS website (IRS Publication 502) or through your FSA administrator.

5. How do I submit a claim for reimbursement from my FSA?

The process for submitting a claim varies depending on your FSA administrator. Generally, you will need to provide documentation of the expense, such as a receipt or Explanation of Benefits (EOB) from your insurance provider.

6. What is a “run-out period”?

A run-out period is a period of time after the end of the plan year (or grace period) during which you can submit claims for eligible expenses incurred during the plan year (or grace period). This allows you time to gather documentation and file your claims.

7. What happens if I leave my job during the plan year?

If you leave your job during the plan year, you typically have until the end of the plan year (or the end of the grace period, if applicable) to submit claims for eligible expenses incurred before you left your job. You may also be able to continue your FSA coverage through COBRA, but you will be responsible for paying the full premium.

8. Can I use my FSA to pay for expenses for my dependents?

Yes, you can typically use your FSA to pay for eligible healthcare expenses for your spouse and dependents, even if they are not covered under your health insurance plan.

9. What happens to my FSA if my employer changes FSA administrators?

If your employer changes FSA administrators, your existing FSA funds will typically be transferred to the new administrator. You will continue to be able to use your funds to pay for eligible expenses.

10. Can I use my FSA funds for cosmetic procedures?

Generally, cosmetic procedures are not eligible for reimbursement with FSA funds, unless they are medically necessary to treat a specific condition. For example, reconstructive surgery following a mastectomy may be eligible.

11. Are there any over-the-counter items that require a prescription for FSA reimbursement?

Previously, many over-the-counter items required a prescription for FSA reimbursement. However, the CARES Act eliminated this requirement, making a wide range of over-the-counter medications and products eligible for FSA reimbursement without a prescription.

12. How do I find out if my employer offers a rollover or grace period?

The best way to find out if your employer offers a rollover or grace period is to contact your Human Resources department or your FSA administrator. They can provide you with specific details about your FSA plan and its rules.

Conclusion

Navigating the intricacies of FSA rollovers, grace periods, and “use-it-or-lose-it” rules can feel like a healthcare hurdle. However, understanding the options available and planning strategically can help you maximize the benefits of your FSA and minimize the risk of forfeiting valuable funds. Always consult with your HR department or FSA administrator for personalized guidance and specific details about your plan. With careful planning and informed decision-making, you can make the most of your FSA and confidently manage your healthcare expenses.