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Grace Period Extension Explanation Letter
Many of you
have heard about the U.S. Treasury Department’s recent
announcement which affects the "use it or lose it"
requirement of Flexible Spending Arrangements (FSAs). The
"use it or lose it" rule requires FSA participants to
forfeit any plan contributions made during a Plan Year to
the extent eligible expenses do not meet or exceed those
contributions during their particular plan’s Plan Year. The
Treasury Department’s announcement allows FSA plans to
permit participants to incur eligible expenses for up to 2 ½
months after the end of a Plan Year before the contributions
made during such Plan Year are subject to forfeiture. From
the employee’s perspective, the "use it or lose it rule" has
always been the biggest downside to participating in FSA’s.
Therefore, this announcement of this increased flexibility
has been met with a great deal of enthusiasm by both
employers and employee alike. Unfortunately, the Treasury
Department’s announcement raised a few potential problems
that require further consideration before employer’s decide
whether to incorporate the grace period provisions into
their plan or not. Fortunately, we now have some guidance on
how those issues will be resolved.
Before
describing potential problems with utilizing the grace
period, it is important to emphasize that the grace period
is not automatic but must be adopted by Plan Sponsors
through a plan amendment prior to the end of the Plan Year
for which the grace period will apply. Some Plan Sponsors
will choose not to offer the grace period for reasons
running from administrative simplicity to financial
considerations.
Even if a Plan
Sponsor decides that implementing the grace period is a
desirable option for its plan, there were three main issues
raised by implementing the grace period which were unclear.
First, implementing the grace period may cause some
participants to violate the $5,000 annual reimbursement
limit for dependent care reimbursements. If funds from a
previous plan year are used to reimburse expenses incurred
during the grace period and then another full $5,000 of
dependent care expenses are incurred during the plan year in
which the grace period occurred, a Participant could be
deemed to be receiving benefits for more dependent care
expenses in one year than allowed under federal statute.
Fortunately, the IRS released Notice 2005-61 on September 7,
2005 which essentially eliminates this concern by
re-confirming that the limit is based on the timing of a
Participant’s contributions to their Dependent Care Flexible
Spending Arrangement, not when the reimbursements are made.
The second
issue is that implementing the grace period may cause a
Health FSA to lose its status as an excepted benefit under
HIPAA’s portability rules. The loss of this excepted benefit
status would require FSA Plan Sponsors to issue HIPAA
Certificates of Creditable Coverage to all covered
individuals under the FSA plan when they lose eligibility
for coverage. Even more problematic, the loss of the HIPAA
excepted benefit status would cause Health FSAs to be
subject to the full coverage periods other health plans are
subject to under COBRA. Health FSAs that are excepted
benefits under HIPAA are only subject to continuing coverage
periods through the end of the current FSA plan year. If the
excepted benefits status is lost, participants who lose
their coverage under a health FSA would be entitled to
continuation coverage for as long as 36 months (for example
individuals who divorce a current participant).
At a recent
conference of Section 125 Administrators in Reno, Nevada,
high ranking IRS officials informally indicated that the
issue of the loss of excepted benefit status will not be a
problem for Plan Administrators as a result of implementing
the grace period. This potential for this problem was
described as an unintended consequence of the implementation
of the grace period rule. The IRS officials indicated that
Plans would not lose their excepted benefit status under
HIPAA due to the implementation of the grace period.
Finally, for
individuals who wish to make contributions to an HSA, if
they are participants in an unrestricted Health FSA during a
Plan Year for which a grace period applies, the existence of
the grace period could disqualify that Participant (and
their spouses) from making contributions to an HSA for any
month which begins during the grace period even if that
particular Participant did not take advantage of the grace
period. This issue remains unresolved.
Based on this
latest information, Admin America now believes that it is
okay for Plan Sponsors to amend their plans to permit the
grace period if they so desire although if the Plan Sponsor
believes that any current Participants will begin utilizing
HSAs next year, those participants should be warned of the
potential limitations the grace period might impose on them.
If you would
like to have your Plan amended for this purpose, please send
an e-mail request to
trey@adminamerica.com. In that e-mail, it is
imperative to include the following three pieces of
information:
1) Whether
you want the grace period to apply for the current plan
year or only future plan years,
2) How
long do you want the grace period to run (1-75 days),
and
3)
Finally, how long after the grace period do you want to
give all participants to file claims (1 to 3 months).
If you have
any questions about the grace period or how it operates,
please contact
Trey Tompkins at Admin America. |
