What Is a Carryover Provision?
A carryover provision—also known as a fourth-quarter deductible carryover—is a clause commonly found in health insurance contracts. The purpose of carryover provisions is to enable policyholders to reduce their out-of-pocket expenses in the following year by applying a portion of the current year's claims against the next year's deductible. Typically, this provision only applies to expenses incurred in the final three months of the current year.
Key Takeaways
- A carryover provision is a clause commonly found in health insurance contracts.
- It entitles the policyholder to have a portion of their current year’s claims applied toward the next year’s deductible, thereby reducing their out-of-pocket expenditures.
- The provision typically comes into effect during the last three months of the present year, and comes at the cost of higher insurance premiums.
How Carryover Provisions Work
When purchasing a health insurance policy, the policyholder is responsible for covering the cost of any expenses up to a predetermined annual amount, which is known as the policy’s “deductible”. The exact deductible can vary greatly depending on the insurance policy, but policies with higher deductibles generally have lower monthly premiums, and vice-versa.
By purchasing an insurance policy with carryover provisions, the policyholder has greater control over the timing of how specific expenses are recognized. This in turn can help them limit the total amount of out-of-pocket expenses they must incur. For example, consider the case of a policy with a $1,000 deductible in which the policyholder incurs $2,000 worth of medical expenses in the current year. Under the terms of the carryover provision, a portion of the excess medical expenses can be applied toward the policyholder’s deductible in the following year, thereby limiting the amount of money they must pay toward that deductible themselves.
Carryover provisions are commonly found in employer-sponsored health insurance plans, but can also be included in Flexible Spending Accounts (FSA) and various individual plans as well. Policyholders can benefit from having a carryover provision on a policy if they generate a high number of claims in one year and have already met their deductible.
The IRS has released new guidance that allows employers more flexibility for benefit plans during the 2020 crisis. Among other things, Notice 2020-29 allows employees to apply unused amounts remaining in a health FSA at the end of a grace period or plan year ending in 2020 to pay or reimburse medical care expenses incurred through December 31, 2020. However, these provisions are entirely at the discretion of the employer. If you're not sure about your options, check with your HR or benefits person.