In a survey by  the Deloitte Center for Health Solutions and the ERISA Industry Committee, of the 97 percent of companies that offer both a health and dependent care flexible spending accounts, only 34 percent said they plan to allow the carryover for both.

Employers use FSAs to give employees the opportunity to set aside pre-tax money to fund anticipated health and dependent care -- such as child care -- expenses for a year. he grace period is designed to provide some relief from the use-it-or-lose-it rule, which requires employees to forfeit any money remaining in their FSAs at the end of the plan year.

"Employers, policy makers and employees have been complaining for years that the use-it-or-lose-it rule discourages employees from contributing to FSAs and encourages those who do contribute to make wasteful or frivolous expenditures at the end of the year," said Martha Priddy Patterson, director of national employee benefits policy at Deloitte. "But many employers think the grace period may not be the answer. Half of the participants in our survey either do not plan to offer the grace period at all or are undecided."

The guidance issued by the Treasury Department and Internal Revenue Service permits, but does not require, employers to amend plans to give health and dependent care FSA participants a grace period.

Employers not extending the grace period to either health or dependent care FSA participants offered a variety of reasons for not doing so. Sixty-seven percent were concerned about tracking account balances for two separate plan years simultaneously; 58 percent were concerned about coordinating the grace period with their run-out periods; 49 percent said they did not feel the grace period was needed because forfeitures had not been a significant problem for FSA participants; and 42 percent cited difficulties in explaining the grace period to participants.

The survey also asked respondents to specify other reasons for not offering the grace period to health or dependent care FSA participants. Several respondents said they were planning to implement consumer-driven health plans with health savings accounts (HSAs) in 2006, and individuals participating in the health FSA this year would not be eligible to fund HSAs during the grace period. Others cited various administrative problems, and some expressed doubts about whether the grace period would change employee behavior.

The incidence of employers offering the grace period could increase significantly in the future because just over a quarter of surveyed employers said they were undecided about the grace period, and many said they are waiting for more Treasury guidance on the grace period, or for more information from other employers' experiences.

A large majority of those offering the grace periods will make them available this year, with large majority offering them for the maximum amount of time:

• 73 percent of those offering just the health FSA grace period will make it available in 2005, and 21 percent will make it available in 2006.
• 85 percent offering the health FSA grace period will make it available for two and a half months, with 9 percent offering it for two months and 4 percent for one month.
• 81 percent offering the dependent care FSA grace period will make it available in 2005, and 17 percent will make it available in 2006.
• 88 percent offering the dependent care FSA grace period will make it available for two and half months, while 8 percent will make it available for two months and 2 percent will make it available for one month.

The Deloitte/ERIC 2005 FSA Grace Period Survey was conducted from July 18 through July 26, 2005. A total of 318 employers from the private sector and the government participated in the Internet-based survey. Sixty-one percent of respondents have at least 2,000 employees, and 19 percent have more than 20,000 employees.