Amazing grace: Help employees use the FSA grace period to their advantage

With the new year under way, employees may be celebrating the fact that they successfully spent all their flexible spending account (FSA) contributions before the Dec. 31 use-it-or-lose-it deadline or lamenting the fact that they had to forfeit some of their funds. But if your organization is among the estimated 37% (according to VISA) that offer an FSA grace period extension, you still have an opportunity to help employees make the most of their remaining tax-free funds.

The FSA grace period gives account holders an additional 2.5 months after the plan year deadline to spend FSA funds. For most people, the grace period deadline is March 15. Yet, even with that grace period, nearly 40% of FSA users forfeit funds, which amounts to more than $1 billion in forfeited funds each year.

For employers that offer an FSA grace period, this is the perfect time for HR teams to educate employees about this deadline and how to spend their remaining funds. Here are four key things that employees should understand about their FSA to make the most of the grace period deadline.

1. The most common FSA grace period is almost here. For FSA holders with a grace period and plan year end date of December 31, 2023, the FSA grace period will run through March 15, 2024. These lucky FSA users get this extra time to continue to spend remaining funds from the prior year on eligible expenses. After March 15, with the exception of a run out period if offered, most people will lose their funds entirely.
2. Not everyone has a grace period extension, and a grace period is different from a run out. While a grace period gives employees valuable time to spend remaining FSA funds, start by educating them on what this optional extension is and how it works with a run-out period (if your organization offers this). While a grace period allows users to spend funds from the prior year into the new year, a 90-day run-out period gives employees extended time to submit for reimbursement of expenses incurred during the prior year only. Employers can combine a grace period and a run-out period, but cannot combine a grace period with an FSA carry over, which allows users to carry over up to $640 of unspent funds (in 2024) to the next plan year.
3. FSAs offer significant tax savings: Because FSA contributions are pre-tax, employees can save an estimated 30%, depending on their tax bracket, when they enroll in and use an FSA. An FSA savings calculator can help employees understand their savings opportunity and the impact of leaving unspent contributions in their accounts.
4. FSA funds can cover a variety of clinical services: If employees have been remiss in scheduling health care visits, the FSA grace period provides some extra time to schedule everything from routine medical and dental appointments to vision checkups to mental health appointments. For example, eligible dental services include bridgework, crowns and caps, dentures, fillings, extractions, sealants, root canals and more. Meanwhile, vision care can include annual exams, laser eye surgery, glasses, contacts, and related supplies. Employees can also use their FSA funds to cover deductibles and copayments, but not insurance premiums.
5. FSA eligibility includes thousands of everyday health items: Most people have some idea of what they might buy with FSA funds, but there are thousands of everyday health products that your employees may not realize qualify for FSA spending. That list continues to grow, too. In recent years, changes have added eligibility for menstrual care products and expanded eligibility for over-the-counter pain relief and allergy medication. There are other items users might be surprised are eligible, as well, such as an oral light therapy device to ease pain in teeth and gums, or a mask that uses compression and heat to relieve migraine pain. In fact, recent estimates suggest that the average household spends $1,600 each year on items that they could purchase with tax-free FSA funds. You can help employees maximize their money by directing them to a comprehensive eligibility list.

Related: FSAs: A smart way for employees to save for their wellbeing

Optional FSA extensions are valuable for employees, but only if they understand how these features work to help them avoid forfeiting tax-free funds. By providing timely, accurate education about deadlines, eligibility, and the tax benefits of spending FSA contributions, HR professionals can help employees recognize significant savings on health-related expenses. For additional resources, consider directing employees to an FSA learning center to help them better understand their account and how to use it.

Rachel Rouleau is chief compliance officer at Health-E Commerce, parent brand to FSA Store and HSA Store, the first and leading online stores for exclusively eligible FSA and HSA shopping, education, and employer solutions.