Carryover Provision

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.

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.

Real-World Example of a Carryover Provision

Katie has a health condition that causes her to require frequent medical attention. Although she is covered by a health insurance policy through her employer, that policy has a $5,000 deductible that must be met before the coverage comes into effect. In order to help limit the amount of money she will need to pay out-of-pocket toward these deductibles, Katie opts to purchase a carryover provision for her contract.

In the three months following the purchase of the carryover provision, Katie has already needed several doctor’s visits and has paid $5,000 in total deductibles. Throughout the remaining nine months of the year, she has several additional visits, all of which are covered by her insurance policy. 

As she nears the end of the calendar year, Katie’s carryover provision goes into effect. This means that a percentage of the claims filed during those last nine months will be “carried over” into the following year and applied toward the next year’s deductible. In effect, this means that Katie’s out-of-pocket toward her deductibles should be reduced in the following year.