October 5, 2009

IRS regulations prompt upcoming change in flexible spending accounts grace period

All employees with money left in their 2009 health care flexible spending accounts (FSAs) at the end of this calendar year will have their balances converted to a "limited purpose" FSA effective Jan. 1, 2010. A limited purpose FSA can be used only for dental and vision expenses. If employees want to use their FSA funds for other expenses, they must incur the expense by Dec. 31. 

The conversion is necessary to comply with Internal Revenue Service regulations that limit an FSA grace period when an employer offers a health savings account as part of its benefit program. A grace period allows employees to claim expenses incurred through March 15 of the following year on their health care FSA. For example, expenses through March 15, 2009, were eligible on 2008 health care FSAs.

Because Purdue's new Choice Fund medical plan with a health savings account goes into effect Jan. 1, the usual grace period on all 2009 health care FSAs is not permissible, but the IRS does allow remaining balances to be converted to a limited purpose FSA. The change applies to everyone with a 2009 health care FSA, not just to those who enroll in the Purdue Choice Fund for 2010. 

"Although we're sorry to lose the grace period on our health care FSAs, we're grateful that the IRS allows conversion to the limited purpose FSA," said Mike Hanson, medical benefits administrator in Staff Benefits. "This will let employees use their 2009 accounts for dental and vision expenses incurred through March 15, 2010 -- and dental and vision are two of the most popular reasons people enroll in an FSA."

UMR will administer the converted 2009 accounts.

Beginning with 2010 health care FSAs, there will be no grace period and no conversion to a limited purpose FSA. Only expenses incurred through Dec. 31, 2010, will be eligible for reimbursement from 2010 FSAs.

Important dates for 2009 health care FSAs

* Dec. 31 – Last date to incur expenses for your 2009 FSA, except for dental and vision costs.

* March 15, 2010 – Last date to incur dental and vision expenses for your 2009 FSA.

* April 30, 2010 – Last date to submit claims for your 2009 FSA.