The grace period, if instituted by a plan, cannot extend beyond the 15th
day
of the third month after the plan year ends (the “2 and ½ month” rule)
and
must apply to all plan participants. For calendar plan years ending
December
31, 2005, the 2 and ½ month grace period would end on March 15, 2006.
(Thus
a participant in a plan which runs on January 1, 2005 through December
31,
2005 would have until March 15, 2006 to incur expenses (receive
services)
which can be reimbursed from his/her 2005 annual election amount as if
those
expenses had in fact been incurred in 2005.) The grace period for any
given
plan year would apply to any participant in an FSA as of the last day of
the
plan year.
Plan documents must be amended prior to the end of a plan year in order
to
take advantage of the grace period for that plan year (and subsequent
plan
years). Any monies not used prior to the end of the grace period are
subject
to the “use-it-or-lose-it” rule and would be forfeited. (Funds remaining
after the grace period cannot be cashed out or carried over to the next
plan
year.) Under the IRS Notice 2005-42, the employer can continue to
provide a
“run-out” period during which participants can be reimbursed for claims
incurred during the plan year and the grace period.
As mentioned, the grace period is optional. For plan years ending July
31,
2005 or later, HFS customers can amend their current plan to permit a
2.5
month grace period with a 45 day “run-out” period. There will be a $5.00
per
participant charge per plan year for this service ($125 minimum), which
will
be billed upon implementing this change and at the beginning of each
plan
year.
Please contact us for further information or to initiate this change.
The Treasury news release which contains a hyperlink to IRS Notice
2005-42
can be accessed at
http://www.treas.gov/press/releases/js2456.htm.
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