Some employers offer a grace period option with their FSA plans. The grace period extends the deadline in which claims may be incurred by 2½ months after the Plan Year ends. For calendar year plans, the grace period begins Jan. 1st and ends March 15th.
This means that rather than forfeiting money left over in an FSA account at the end of the year, employees have an additional 2½ months to incur claims and spend down any balance on their account from the prior year. It is designed to allow employees the opportunity to take full advantage of their non-taxable contributions when expenses fall short of what was originally projected.
All funds remaining in the account at the end of the grace period are forfeited according to the regular "use it or lose it" rule. Claims submitted during the grace period are automatically taken out of the prior year's remaining funds before drawing from the current plan year.
Grace Period Example
Let’s pretend your plan year ends on Dec. 31st, and you still have $350 left in your account. On Feb. 5th, you incur $400 in eligible medical expenses. After your claim is submitted, the remaining $350 will draw down from your prior year balance and the other $50 is taken out of the funds from the current plan year.
Please note that the grace period feature is not compatible with the rollover feature for FSA plans. Thus, your plan would not have both.