Health Flexible Spending Accounts Carryover Option Administration Client FAQs

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1 Carryover Option Administration Client FAQs The spending account carryover is an optional Plan provision that allows participants in healthcare spending accounts to carry (roll) up to $500 of unused funds from their previous plan year account into the subsequent (current) plan year account. The carryover feature can help participants minimize forfeitures and maximize the value they receive from their healthcare spending account benefit. We know most people have many questions about the carryover and how it is administered by ADP Spending Account Services. This document should address most of your questions. If you have additional questions, please contact your ADP Client Service Team. Please note that all examples in this document referencing specific dates are based on a spending account benefit plan year that begins on January 1 and ends on December 31. If your benefit plan year operates on different begin and end dates, you should adjust these date examples to fit your specific benefit plan year dates. Frequently Asked Questions Q. On which spending account plans is the balance carryover option available? A. Under applicable guidance, the carryover option can be offered on the Full-Purpose Health Care Flexible Spending Account (HCFSA) or the Limited-Purpose Flexible Spending Account (LFSA). Your Plan may offer the carryover option on one or both of these plans. Q. Who is eligible for the balance carryover option? A. Employees must be a plan participant on the last day of the previous plan year to qualify for the carryover balance. This includes participation through COBRA continuation. Please see the section on Carryover Option Administration Under COBRA Continuation for additional information. Q. Can the Plan offer both the carryover option and the Annual Grace Period (AGP)? A. A healthcare FSA cannot offer both the carryover and the AGP. Your Plan has the choice to offer one or neither. Q. Our Plan currently offers the AGP. What happens if we choose to adopt the carryover option? A. If your Plan currently offers the AGP, you must amend your Plan documents to delete the AGP as of the plan year that your Plan adopts the carryover option (e.g., Plan offers AGP on current plan year and adopts carryover for the next plan year, the AGP offering will not be available on the next plan year; only the carryover will be available for next plan year). For more information on the timing of the required amendments, please click on the following link. Q. What if a participant does not elect to participate in the FSA for healthcare expenses for the subsequent (current) plan year but has a balance in their previous year account? A. The carryover process will automatically create an account in the current plan year even if the participant didn t choose to re-enroll in the current year healthcare spending account Plan. ADP will look at the election type (HCFSA or LFSA) from the previous plan year and create the current year account based on that previous election. It is important to note that in this situation, participants would not be able to file any current year claims until the balance carryover occurs, but after the carryover is completed, they would be able to file claims for eligible expenses incurred on or after the first day of the

2 current plan year until the carryover balance is exhausted. For more information about how the carryover is administered between the different spending accounts, please refer to the Carryover Adoption Form. Q. Can we designate that remaining balances not be carried over if the participant does not re-enroll in the FSA? A. No. If the employee was a plan participant, including participants under COBRA continuation, as of the last day of the previous plan year, the employer may not prevent the balance from carrying forward. If a participant did not actively re-enroll for the subsequent (current) plan year, the carryover will automatically create an account based on their prior year election and/or whether the participant may have enrolled in an HSA for the current year. However, the employee may choose to waive the carryover amount and by doing so will preserve their eligibility to make or receive HSA contributions in the current year. Failure to waive the carryover amount will result in the employee being ineligible to receive or make HSA contributions for the entire plan year regardless of when the carryover amount is exhausted. Q. What if the participant s spending account election (HCFSA or LFSA) is different from the election they had in the previous plan year? A. ADP will automatically look to see what elections a participant has in both the previous plan year and the current plan year and will determine how to carryover the balance based on the election in both plan years. For a more detailed look at how the carryover is administered between which accounts, please refer to the Carryover Adoption Form. Q. In the previous plan year, an employee participated in the HCFSA but changed their election for the current plan year to a Health Savings Account (HSA). Can they still receive their carryover balance? A. If a participant changes their election from the HCFSA to the HSA and your Plan offers the LFSA, the previous HCFSA balance will automatically roll to the LFSA. IMPORTANT: Participants may not make or receive HSA contributions for any month in which they are covered under an HCFSA. However, a participant may be covered under an LFSA and be eligible to continue to make or receive HSA contributions. For participants who have switched their enrollment from the previous year HCFSA and are enrolled in a current year HSA, please note the following: If the Plan does not offer an LFSA and the employee has carryover funds from the previous HCFSA, ADP will take no action on the carryover balance and these funds will be forfeited. HOWEVER, if the employee chooses to accept the HCFSA carryover balance, they will be ineligible to make or receive contributions to the HSA for the entire plan year. If the Plan has an LFSA Plan that is not administered through ADP, you must advise ADP. In this situation, ADP will take no action on the participant s carryover-eligible balance and it becomes the LFSA Plan administrator s responsibility to ensure that the carryover-eligible balance from the previous HCFSA is properly allocated to the current LFSA. If the Plan offers the HSA but does not currently offer the LFSA and you would like to offer this 2

3 option for your participants, please contact your ADP Client Service Team immediately to implement this spending account plan option and allow these participants to utilize their carryover funds. Please note that the LFSA plan would be effective as of the date it is adopted and the plan effective date cannot be retroactive to the beginning of your plan year. In this scenario, your LFSA plan would operate on a short plan year (e.g., plan begins April 1 and ends December 31) and participants would only be able to submit eligible expenses incurred during the effective dates of the plan. It s also important to note that participants who have switched to the HSA, have an HCFSA with a remaining balance in the previous plan year and do not accept the carryover will still not be eligible to make/receive contributions to or file claims under the HSA until the first day of the month following the claims filing deadline for the previous year (e.g., claims filing deadline is 3/31, participant may contribute to/file HSA claims as of 4/1; claims filing deadline is 4/15, participant may contribute to/file HSA claims as of 5/1). Q. When will the carryover balance be rolled into the participant s current year account? A. The carryover balance will be rolled into the participant s current year account approximately 6 weeks after the claims filing deadline for the previous plan year (e.g., previous plan year ends 12/31, previous plan claim filing deadline is 3/31, carryover balances will be rolled on or around 5/15). Q. Can our Plan designate a minimum and/or maximum amount for the carryover option? A. At this time, your Plan only has the option to adopt the carryover. That means that ADP will roll any remaining spending account balance that is greater than $0 and up to the maximum of $500 into the current plan year. Any remaining balance in the previous plan year that exceeds the $500 carryover maximum will be forfeited (e.g., previous year balance of $600 after the claim filing deadline, $500 will roll into current plan year and $100 will be forfeited). Q. Do the carryover balances expire? A. No, carryover balances will roll perpetually until the balance is exhausted or employment terminates. Q. How will eligible claims be applied against the carryover balance? A. Before the carryover balance is rolled, claims for eligible expenses incurred during the current plan year will be paid from the current plan year funds. After the carryover balance is rolled, eligible claims will be paid from the carryover funds until they are exhausted. Once the carryover balance is exhausted, eligible claims will start paying from the current year funds again. Q. If there are eligible claims that have been paid under the current plan year before the balance carryover roll, will ADP apply those previously paid claims to the carryover balance? A. No. The carryover balance will not be retroactively applied to claims that have already been paid from current plan year funds. However, after the carryover funds are rolled, any new claims submitted for eligible expenses incurred on or after the first day of the plan year will start paying from the carryover funds. 3

4 Q. What happens to the balance if employment terminates before the last day of the previous plan year? A. If employment terminates prior to the end of the previous plan year, the participant will not be eligible for the carryover balance roll. They will generally be able to file claims for expenses incurred on or before their termination date, in accordance with the claims filing deadline for terminations designated under your Plan. Any funds remaining in the account after the filing deadline will be forfeited. Some plans may allow participants to continue to incur eligible expenses through the end of the month in which their employment is terminated. Please refer to your Plan Document for termination policies. Q. If an employee participated in the previous plan year and elected a current year account under which they received a carryover balance but their employment terminates during the current year, can they continue to use the carryover balance from the previous plan year? A. If a participant received a carryover balance from the previous plan year and their employment terminates during the current plan year, they may continue to incur eligible expenses against the carryover balance through the entire current plan year until the carryover balance is exhausted without the need to elect/pay for COBRA for the current plan year. All claims must be submitted in accordance with the Plan s claims filing deadline for the current plan year. Any balance remaining after the claims filing deadline will be forfeited. Q. Our Plan offers the Health Spending Account Debit Card. Will the card work for carryover balances? A. If a participant made an election in the current plan year, their card will continue to work normally and will automatically begin paying eligible purchases from the carryover balance after the balance roll is complete. The carryover balance funds will not be retroactively applied to card purchases previously paid in the current plan year. If participant did not re-enroll in the current plan year but has a card from the previous plan year and has a carryover-eligible balance, their card will work normally after the carryover balance roll is completed. If they ve already disposed of their card from the previous plan year, they may request a new card after the balance carryover roll is completed. Q. Will the carryover option impact account forfeitures for the plan year? A. The carryover has the potential to significantly impact forfeitures, particularly if your Plan does not currently offer AGP, as any amount equal to or less than $500 will be carryover-eligible and only balance amounts greater than $500 will be forfeited (e.g., participant has $600 balance, $500 is carryover-eligible and client will receive $100 forfeiture). However, if your Plan currently offers AGP and you change to carryover, the Plan is less likely to see a significant difference in forfeitures. 4

5 Carryover Option Administration Under COBRA Continuation Q. This is the first year on which our Plan has offered the carryover option. If employment terminates before the last day of the plan year and the participant elects COBRA continuation for the spending account benefit, will they be eligible for the carryover balance? A. If employment terminates prior to the end of the plan year, they must elect and pay for COBRA continuation through the last day of the plan year to be eligible for the balance carryover option (e.g., termination date is July 1 and they elect/pay for COBRA continuation through December 31). In this situation, they are considered a plan participant as of the last day of the previous plan year and they do not need to elect/pay for COBRA continuation for the subsequent (current) plan year. As a participant on the last day of the previous plan year, they are automatically eligible for the balance carryover and, after the carryover balance roll is completed, they may submit eligible claims incurred from the first day of the current plan year through the end of the current plan year or until their carryover balance is exhausted, whichever happens first. If there are any funds remaining in the account after the claim filing deadline for the current plan year, those funds will be forfeited. If employment terminates prior to the end of the plan year and they do not elect COBRA continuation or they elect/pay for COBRA continuation that ends before the last day of the plan year (e.g., termination date is June 1 and they elect/pay for COBRA continuation through November 30), they will not be eligible for the balance carryover. They may submit eligible claims incurred prior to their termination date or COBRA paid-through date, whichever occurs last, and in accordance with the claims filing deadline for terminations designated under the Plan. Any funds remaining in the account after the claim filing deadline will be forfeited. Some plans may allow participants to continue to incur eligible expenses through the end of the month in which their employment is terminated. Please refer to your Plan Document for termination policies. ADP, the ADP logo and IN THE BUSINESS OF YOUR SUCCESS are registered trademarks of ADP, Inc. Copyright 2014 ADP, Inc. 5