Use It, Don’t Lose It! Everything Your Public Agency Needs to Know About Notifying Employees of the Deadline for Using Flexible Spending Account Funds

Category: Blog Posts
Date: Oct 29, 2019 10:35 AM

On August 30, 2019, Governor Newsom signed Assembly Bill 1554, which requires employers to notify employees of the deadline to withdraw flexible spending account funds.  Many employers offer employees the opportunity to participate in flexible spending accounts.  These are employer-owned accounts into which employees can put money to pay for certain eligible expenses on a pre-tax basis.  Different types of flexible spending accounts include those for health, dependent care (sometimes known as a dependent care assistance programs or DCAPs), and adoption assistance.  Employers often offer these accounts through a Section 125 cafeteria plan. 

Under federal law and regulations, flexible spending accounts are generally subject to the “forfeiture rule.”  The forfeiture rule is a “use it or lose it” rule whereby employee participants must incur expenses and seek reimbursement for eligible expenses from their accounts by a certain date or else they forfeit the remaining funds in their accounts. 

Beginning January 1, 2020, AB 1554 requires employers to notify employees who participate in a flexible spending account of the deadline to withdraw funds before the end of the plan year.  The purpose of AB 1554 is to decrease the amount of flexible spending account funds employees forfeit each year.  The required notification will clarify to employees the exact deadlines by which they must submit reimbursement requests for eligible expenses.  AB 1554 adds Section 2810.7 to the Labor Code.

In preparing to meet this new requirement, public agencies should know the exact deadlines applicable to their flexible spending accounts in order to provide proper notice to employees.  The tricky part in determining the deadline is that the exact deadline depends on the employers’ own flexible spending account structure, the employers’ Section 125 cafeteria plan document, and various options the employer may have chosen. 

Generally, an employee will forfeit any unused flexible spending account funds if the employee does not incur eligible expenses by the end of the plan year and request reimbursements by the end of the run-out period (further explained below).  However, an employer also has options for expanding or adding flexibility to the time period when an employee must incur expenses and the deadline by which an employee must seek reimbursement.

Run-Out Period

Flexible spending accounts commonly allow a “run-out” period, which is the final period after the plan year ends when an employee may submit eligible expenses for reimbursement.  The employee has to incur (i.e. actually receive) goods or services related to the expense before the end of the plan year but can send requests for reimbursement for those expenses after the plan year has ended during the run-out period.

Grace Period

Employers have the option to structure their flexible spending accounts in a cafeteria plan with an extended time period, known as a “grace period.”  A grace period can last up to 2 ½ months after the end of the plan year.  With a grace period, employees may incur expenses after the end of the plan year but before the end of the grace period.  Those expenses will be treated as if they had been incurred during the actual plan year.  Employees can continue to access their flexible spending account funds for reimbursement and will not “lose” unused funds until after the expiration of the grace period. 

A grace period is different from a run-out period because a run-out period extends the time for submitting expenses for reimbursement that were incurred prior to the end of the plan year, whereas a grace period allows reimbursement for expenses incurred after the end of the plan year.  (Note: After the end of a grace period, a cafeteria plan may still provide a run-out period for submitting reimbursement requests.)


Carryover is another issue that must be considered for notice.  For health flexible spending accounts, employers have the option to allow employees to carry over up to $500 of unused funds from one plan year into the subsequent plan year, notwithstanding any otherwise applicable rule requiring forfeiture.  The carried-over funds are available for reimbursements for eligible medical expenses incurred in the subsequent plan year.  A health flexible spending account may be structured to either offer carryover or a grace period but cannot offer both.  Carryover is an option for health flexible spending accounts only and may not be used for dependent care or adoption assistance flexible spending accounts.  The employer’s Section 125 cafeteria plan document must provide this option in order for the employer to allow a carryover.

What Public Agencies Should Do to Prepare for Notification of the Withdrawal Deadline

In order to comply with AB 1554 and notify employees of the deadlines to withdraw flexible spending account funds, employers must know when the deadline falls for each type of flexible spending account offered to employees.  Public agencies should look at their own Section 125 cafeteria plan documents or other benefit documents to determine:

  • When the plan year or coverage periods ends (whether it is December 31st or a different date);
  • Whether there is a run-out period offered, and if so, the length of the run-out period;
  • Whether there is a grace period, and if so, the length of the grace period (maximum of 2 ½ months); and
  • For health flexible spending accounts, whether carryover is allowed (if there is no grace period for the account).

Under AB 1554, employers must notify employees of any deadline to withdraw funds before the end of the plan year. 

How Should Public Agencies Give This Notice?

AB 1554 requires the notice via two different forms, one of which may be electronic.  Notices may be made by e-mail, telephone communication, text message notification, postage mail notification, or in person.  Beginning with the plan year encompassing January 1, 2020, public agencies should prepare to communicate such information by the end of each plan year.

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