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Some Employers Feel Awkward About Grace Periods

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As many as 34% of large U.S. employers may not make the new 2.5-month “grace periods” available to holders of both health flexible spending accounts and dependent care flexible spending accounts.[@@]

Researchers from the Deloitte Center for Health Solutions, Washington, and the ERISA Industry Committee, Washington, have published data supporting that confusion in a report on a Web-based survey of 318 large employers conducted in July.

Normally, the federal government imposes a “use it or lose it rule” on employees who contribute to FSAs then fail to use the money by the end of the war. The funds are supposed to revert back to the employer.

In May, the Internal Revenue Service gave employers permission plans to provide 2.5-month FSA grace periods after the plan year is up.

A wide majority of large employers will offer grace periods for health FSA holders, but many will not offer grace periods to dependent care FSA holders, according to the researchers who wrote the survey report.

Employers are more likely to offer health FSA grace periods partly because of a belief that dependent care expenses are more predictable than health expenses, the researchers write.

Even on the health side, many large employers say health FSA forfeitures have not been much of a problem, the researchers write.

But the researchers note that some regulatory and administrative concerns continue to worry large employers:

Among employers not offering dependent care FSA grace periods:

- 9% of the employers say they are not sure how to explain the concept to employees.

- 67% of the employers fear grace periods would somehow cause employees to exceed the $5,000 annual limit on tax-free reimbursements.

Meanwhile, 67% of the employers not adding any FSA grace periods worry about the problem of tracking account balances for 2 separate plan years simultaneously, and 43% of all the employers say they want to see more IRS guidance on the issue.

About 25% of the employers that are not adding grace periods say requests from employees could change their minds.