Benefits August 10, 2005

A Third of Employers Embrace Full FSA Grace Period

August 10, 2005 (PLANSPONSOR.com) - Half of US employers plan to allow employees to take advantage of new federal tax rules allowing them to carry over unused flexible health care spending accounts for two and a half months into the new year, according to a survey.
Reported by

A news release from the DeloitteCenter for Health Solutions and the ERISA Industry Committee said, however, that the survey of 318 employers found that only 34% planned to extend the grace period to allow participants in both the health care and dependent care flexible spending accounts (FSA) to carry over unused money. Ninety-seven percent of the companies surveyed offer both a health and dependent care FSA.

In May, the Treasury Department and Internal Revenue Service issued guidance permitting (but not requiring) employers to amend plans to give health and dependent care FSA participants a grace period of up to two and a half months to incur eligible expenses that can be paid from the previous year’s salary contributions.

Employers planning to not offer the grace period to dependent care participants specified several factors at work for their decision:

  • 70% of respondents said dependent care expenses are more predictable than health expenses so the grace period is not needed
  • 50% said they had no prior problems with forfeitures.
  • 9% said they had concerns about explaining the grace period to participants.
  • more than six in 10 (67%) said they were concerned the grace period would cause inadvertent tax problems for dependent care FSA participants. A participant in a dependent care FSA with a grace period could exceed the $5,000 annual limit on tax-free reimbursements, resulting in additional federal income and employment tax liability.
  • 54% cited the concern that the grace period also could create Form W-2 reporting problems for employers. IRS officials have said employers will have to report participants’ actual reimbursements from dependent care FSAs with grace periods.

Employers not planning to not offer the grace period to dependent or health care participants specified several factors at work for their decision:

  • 67% of those not offering the grace period were concerned about tracking account balances for two separate plan years simultaneously.
  • 58% were concerned about coordinating the grace period with their runout periods
  • 49% said they did not feel the grace period was needed because forfeitures had not been a significant problem for FSA participants
  • 42% cited difficulties in explaining the grace period to participants.

The incidence of employers offering the grace period could increase significantly in the future because just over a quarter of surveyed employers said they were undecided about the grace period, and:

  • Four in 10 (43%) of these employers said they are waiting for more Treasury guidance on the grace period
  • 24% said they are waiting for information about other employers’ experiences
  • 25% indicated employee requests for the grace period would be relevant to their decisions.

A large majority of those offering the grace periods will make them available this year:

  • 73% of those offering just the health FSA grace period will make it available in 2005 and 21% will make it available in 2006.
  • 85% offering the health FSA grace period will make it available for two and a half months, with 9% offering it for two months and 4% for one month.
  • 81% offering the dependent care FSA grace period will make it available in 2005, and 17% will make it available in 2006.
  • 88% offering the dependent care FSA grace period will make it available for two and half months, while 8% will make it available for two months and 2% will make it available for one month.

The Deloitte/ERIC 2005 FSA Grace Period Survey was conducted from July 18 through July 26, 2005. A total of 318 employers from the private sector and the government participated in the Internet-based survey. The results are here .

«