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Grace Period and Correcting Error


Rai401k
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Can someone explain how the Grace Period works under a FSA plan? And how to correct monies that have been forfeited if the prior years forfeitures were never used due to employer misunderstanding of the grace period.

- My understanding was if you made an election for example of $2,500 under Health for 2012. You can submit claims until March 15th of 2013 BUT the claims would have to be dated during the 2012 plan year. In other words you still have time after the close of the plan year to submit but the bills/claims must be attributable to 2012. I now understand this is incorrect....

- Under the grace period if your election was $2,500 in 2012 and you only submitted $1,500 in claims, you still have $1,000 BUT you can have claims which are dated in the new year (2013) until 3/15 which can use up the $1,000. Is this the correct???

We were allowing employees to use up any amount that was left as of 12.31 until 3/15 of the next year however we informed them that the claims have occurred during the plan year it applied too. If this is incorrect what do we do with the monies that were forfeited from the prior plan year? Can we pay it out to the participants?

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The grace period operates the way the plan says that it operates. A grace periond is not required. The plan had to be amended to provide for it and the terms did not have to go as far as the law allowed.

The plan document does allow for a grace period. That's the problem the documents isn't clear to us as exactly how it works. The way we were reading it was based on my initial understanding that the claims but have incurred during the plan year but can be continued to be submitted until 3/15 of the next year. However based on what we have read on the IRS website and under different research guides the term grace period means that they can continue to incur the costs in to the new plan year up until 3/15 and use up the prior years elected amount. This is what I need to confirm. Also if we misinformed the participants about the grace period what happens to those forfeited amounts that are still sitting in the acct from prior years.

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The idea of the grace period is that expenses incurred after the end of the year could be covered or reimbursed with respect to the elected coverage for the year. No matter what, you should have no amounts "sitting in the acct from prior years." You seem to have no support and the situation appears to be so fouled up that you need to hire someone to help you straighten it out.

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There are two things that have gotten confused since the grace period came about 6-7 years ago.

Prior to that time there was a "run out" period. It was a time that allowed participants to submit reimbursement requests for expenses incurred during the earlier plan year. Sometimes it was only 30 days, but could be as long as 75 days. So for a 2012 calendar year plan, participants could submit claims until March 15, 2013. The claims had to be for expenses incurred during 2012.

Then the grace period was introduced. Unfortunately the time frames for both items were often exactly the same. It was possible to add an additional time frame for an additional run out period after the grace period, but no adminstrator wanted to keep the books open that long.

So a grace period (and this DOES have to be in the plan document) allows a participant to make an election for 2012 and use that money for expenses incurred from January 1, 2012 until March 15, 2013.

So, the key issue is often making sure an expense in January 2013 is reimbursed from the proper account. It SHOULD be paid from any 2012 money remaining, but sometimes the accounting isn't done correctly.

This is very possibly what has happened. I'm sure it is also some confusion between grace period and run out period. Hopefully, this gives you enough to go back and work through the plan years and reach the correct amount.

Under no circumstances should you have amounts still sitting in prior years accounts. It should be forfeited and retained by the employer. But make sure you've accounted correctly.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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There are two things that have gotten confused since the grace period came about 6-7 years ago.

Prior to that time there was a "run out" period. It was a time that allowed participants to submit reimbursement requests for expenses incurred during the earlier plan year. Sometimes it was only 30 days, but could be as long as 75 days. So for a 2012 calendar year plan, participants could submit claims until March 15, 2013. The claims had to be for expenses incurred during 2012.

Then the grace period was introduced. Unfortunately the time frames for both items were often exactly the same. It was possible to add an additional time frame for an additional run out period after the grace period, but no adminstrator wanted to keep the books open that long.

So a grace period (and this DOES have to be in the plan document) allows a participant to make an election for 2012 and use that money for expenses incurred from January 1, 2012 until March 15, 2013.

So, the key issue is often making sure an expense in January 2013 is reimbursed from the proper account. It SHOULD be paid from any 2012 money remaining, but sometimes the accounting isn't done correctly.

This is very possibly what has happened. I'm sure it is also some confusion between grace period and run out period. Hopefully, this gives you enough to go back and work through the plan years and reach the correct amount.

Under no circumstances should you have amounts still sitting in prior years accounts. It should be forfeited and retained by the employer. But make sure you've accounted correctly.

Bill that's exactly where we were mistaken. Thank you for clearing that up. Grace Period VS. Run Out Period. We thought it was the same thing. The document clearly states that there is a grace period that ends 3/15 and now that you've stated "run out" period I see that that ends 90 days after the plan year. We will make sure that the money has been forfeited.

Thank you!

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So what did you do about expenses incurred by 3/15 of the next year when a participant had not exhausted the full coverage with expenses incurred in the year? If the plan says there is a grace period, then the participant should get the benefit of the grace periond. You seem to say that you did not provide a grace period in operation and that suggests you have some other fixing to consider.

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So what did you do about expenses incurred by 3/15 of the next year when a participant had not exhausted the full coverage with expenses incurred in the year? If the plan says there is a grace period, then the participant should get the benefit of the grace periond. You seem to say that you did not provide a grace period in operation and that suggests you have some other fixing to consider.

That's exactly what we didn't do. We are trying to figure out how to correct something like this....I'm not sure if EPCRS is available for FSA plans. We are still doing our research.

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Please let us know if you find any guidance. I do not think there is any official prescriptive guidance and there is no correction program. From time to time certain IRS officials have provided informal statements about corrections. Your best source for suggestions is probably EBIA, but you won't get a prescription there, either.

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