The IRS has modified the Cafeteria Plan regulations to establish a "grace" period beginning with the 2005 plan year.  The grace period allows participants with remaining Health Care Spending Account balances at year end to have an additional 2 1/2 months (until March 15) of the following year to incur additional eligible expenses and use prior year funds to pay for these expenses.

Note that this extension is optional, but most FSA administrators are choosing to allow it in hopes of increasing flex-plan participation rates.

Q.  Who is eligible for the new extended grace period?

A.  All participants who are actively participating as of the last day of the plan year are eligible for the grace period.

Q.  How does the grace period work?

A.  The following example illustrates how it works. Sam contributed $1,000 during 2005 to his Health Care Spending Account. His remaining balance is $300 on Dec. 31. In January 2006, Sam incurs $200 in expenses. He can use the $300 remaining from 2005 to pay for the $200 of expenses he incurred in 2006. If Sam doesn't have additional expenses between Jan. 1 and March 15, he will forfeit the remaining $100.

Here's another example:  Mary contributed $5,000 to her 2005 Health Care Spending Account. She has a balance of $125 on Dec. 31, 2005. On March 1, 2006, Mary incurs $350 in expenses. She can use the $125 remaining for 2005 to reimburse a portion of her expense. The remaining $225 will be reimbursed using Mary's 2006 contributions. Mary will not forfeit any of her 2005 funds.

Q.  Is there a special claim form for grace period expenses?

A.  Your Health Care Spending Account Reimbursement Form should be updated with two additional boxes on the form.  The boxes are labeled "current plan year" and "prior plan year."  For grace period claims (or any prior plan year claims), you must check the "prior plan year" box.  If a plan year is not selected, expenses will be processed using funds based on the service date.