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How to qualify for FSA grace period

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in Small Business Tax

Q: I read somewhere that employees can now spend the money in their flexible spending account after Dec. 31. My employer hasn't given any notice about this. Is that extension automatic? S.M., Cincinnati

A: No, but it's not a big deal for your company to implement the extension. All it has to do is amend its plan documents relating to the flexible spending accounts (FSAs). The old "use it or lose it" provision said employees had to spend their FSA money by the end of the plan year or they'd lose it. The new rules allow employees to spend FSA dollars contributed in 2005 as late as 21/2 months after the end of the plan year (March 15, 2006, for calendar-year plans). Find details of the new rules in IRS Notice 2005-42 at

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