A grace period is an extension of time after the end of a plan year during which employees can incur new eligible expenses and be reimbursed using funds from the previous plan year. In effect, it extends the period during which prior-year funds can be used for eligible expenses.
The IRS allows employers to offer a grace period of up to 2.5 months for Health Care FSAs, Limited Purpose FSAs (LPFSAs), and Dependent Care FSAs (DCFSAs). Offering a grace period is optional and is determined by the employer’s plan design.
Note: An FSA plan may offer either a grace period or a carryover feature, but not both.
To confirm the grace period for the current plan year, log in to Forma Admin and navigate to the Benefits section. You’ll see details for all your employees’ benefits, including grace period.
Example
Suppose your FSA plan includes a 75-day grace period. An employee ends the 2025 plan year with $500 remaining in their FSA and receives their 2026 FSA election of $3,400 on January 1, 2026.
On March 1, 2026—within the 75-day grace period—the employee incurs and submits a claim for a $600 eligible expense. Because the expense occurs during the grace period, the remaining 2025 FSA balance is used first.
When the claim is approved:
- $500 is reimbursed from the employee’s remaining 2025 FSA balance.
- The remaining $100 is reimbursed from the employee’s 2026 FSA balance.
As a result, the employee receives the full $600 reimbursement, fully exhausts their 2025 FSA funds, and has $3,300 remaining in their 2026 FSA.