PEO
FSA Deadlines Are Approaching: What Employers Should Do Before Year-End
By Anthony Beck, . Insurance Wire.
Employee Benefit News has highlighted the importance of sending FSA reminders before the final weeks of the year, particularly as employers conduct open enrollment for 2027.
FSAs allow employees to set aside money through payroll deductions, generally on a pretax basis, to pay qualifying expenses. However, unused balances may be forfeited depending on the plan's provisions.
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Understanding FSA Carryovers and Grace Periods
Under IRS rules, health FSAs generally follow one of three approaches to unused funds.
A traditional use-it-or-lose-it arrangement requires employees to incur eligible expenses by the end of the plan year.
Alternatively, employers may permit a carryover into the following plan year, subject to an IRS limit. For plan years beginning in 2026, the maximum permitted carryover is $680, although employers may establish a lower limit.
A health FSA may instead provide a grace period of up to two months and 15 days after the plan year ends. For calendar-year plans, this generally extends the spending deadline through March 15.
Health FSAs cannot offer both a carryover and a grace period for the same plan year.
Dependent care FSAs cannot use the health FSA carryover provision but may offer a grace period.
Employers should also distinguish between the deadline for incurring expenses and the deadline for submitting reimbursement claims. A plan may allow additional time to submit claims for expenses incurred before the spending deadline, commonly called a run-out period.
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Which Expenses Are Eligible?
Health FSAs generally reimburse qualified medical expenses under Internal Revenue Code Section 213(d), subject to plan provisions.
Eligible expenses commonly include deductibles, copayments, coinsurance, prescription medications, dental treatment, vision care, eyeglasses, contact lenses, certain over-the-counter medications and menstrual care products.
Some less familiar products may qualify depending on their medical purpose. Certain sleep-related medical devices or health-monitoring equipment may be eligible when used to diagnose or treat a medical condition. General wellness products and consumer electronics do not automatically qualify.
Dependent care FSAs follow separate rules and generally reimburse qualifying care expenses that enable an eligible employee, and spouse if applicable, to work or look for work.
Employees should consult their FSA administrator's eligibility guidance before making purchases.
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Why Open Enrollment Matters
Open enrollment allows employees to review their expected expenses and determine how much to contribute for the following year.
For 2026, the IRS health FSA salary reduction contribution limit is $3,400, although employers may impose a lower limit.
Employees should estimate anticipated medical, dental and vision expenses when making their 2027 elections, using the applicable contribution limits and plan provisions.
Employers should also explain the differences between FSAs and health savings accounts (HSAs).
Participation in a general-purpose health FSA can affect eligibility to contribute to an HSA. Certain limited-purpose or post-deductible FSAs may be compatible with HSA eligibility.
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What Employers and PEOs Should Communicate
Employers should confirm their plan provisions with their benefits administrator and provide employees with the applicable spending deadline, carryover or grace period rules, reimbursement submission deadline and instructions for checking balances and filing claims.
For businesses using a Professional Employer Organization (PEO), the PEO may administer the FSA, provide account access and coordinate enrollment communications.
Employers should verify the specific terms available through their PEO rather than assuming all arrangements offer the same provisions.
For calendar-year plans, reminders beginning in October give employees time to review balances, schedule eligible appointments and make qualifying purchases. A follow-up closer to the deadline can reach employees who still have unused funds.
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Measuring FSA Participation and Utilization
Aggregate reporting from an FSA administrator can help employers evaluate participation, reimbursement activity and forfeited balances without disclosing employees' individual medical information.
Consistently low utilization may indicate that employees need clearer guidance about eligible expenses, reimbursement procedures or contribution planning.
However, unused balances are not necessarily the result of poor communication. Actual medical expenses may differ from what employees anticipated when making their elections.
The objective is to help employees use their accounts appropriately and avoid unnecessary forfeitures, not encourage spending simply to exhaust remaining funds.
Source: https://www.benefitnews.com/news/don-t-wait-until-december-how-to-encourage-end-of-year-fsa-use-now
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