The High Cost of Unused Flexible Spending Accounts

Did you know that a whopping $7.2 billion of Flexible Spending Account (FSA) funds were left on the table in 2019 and 2020? Yep, that’s what a special analysis by Money revealed, and it turns out the issue is bigger than we thought.

FSAs, those nifty tax-advantaged accounts that let employees cover eligible health-related expenses like copayments, prescription medications, and even over-the-counter drugs, have a catch—thanks to the IRS. If you don’t use the funds by a certain deadline each year, you can kiss that money goodbye as it reverts back to your employer. Ouch.

Recent studies have shed more light on this costly problem. Over 40% of FSA holders lost at least some of their contributions because they didn’t meet the spending deadline. Imagine saying farewell to between $339 and $408 each year. That’s not just pocket change!

Navigating the Risky Waters of FSA Contributions

Deciding how much to throw into an FSA can feel a bit like gambling for those who aren’t regularly shelling out for medical expenses. To play the game, you guess your upcoming out-of-pocket healthcare costs up to a max (hello, $2,850 as of 2022), and pray you’ve got it just right—or risk losing what you don’t use by New Year’s Eve.

Most employers drop the deadline hammer on December 31, but some throw you a lifesaver with a grace period stretching to March 15 of the following year. Phew!

Billions Lost to FSAs: A Closer Look

A new database by the Employee Benefit Research Institute (EBRI) gives us a deeper dive into this FSA fiasco. It turns out, 44% of employees waved goodbye to their FSA funds in 2019, with each person losing an average of $339. Fast forward to 2020, and it’s even grimmer—48% lost out, with the average loss per person ticking up to $408. These figures make the previously estimated annual losses of $400 million to $500 million look like chump change.

Unclaimed FSA Funds: Where Do They Go?

So where does all this unspent FSA money end up? Well, employers set the deadlines, and they may allow you to roll over up to $550 to the next year or give you a bit more time with a grace period. Thanks to tweaks in rules like those in the Consolidated Appropriations Act of 2021, there’s been a bit more wiggle room lately, though it’s a mixed bag on how widely these more lenient rules are adopted.

Once any grace periods or carryovers run out, any remaining funds are forfeited. Your employer might use this money to help manage these benefits or for other mysterious “administrative purposes” that they tend to be quite hush-hush about.

Preventing Losses and Maximizing FSA Benefits

Despite the risk of losing money, FSAs can still be a tax-savvy choice. They lower your taxable income and can handle a variety of healthcare costs. With some savvy planning and keeping a close eye on how much you have left versus what you need to spend, you can dodge losses and make the most of these accounts.

Thanks to legislative changes like the CARES Act, the list of eligible expenses has grown—more ways to spend wisely! Really dialing into your spending habits, understanding your healthcare needs, and getting the scoop on your employer’s FSA specifics are crucial to truly benefiting from this financial tool. So, are you ready to get the most bang for your healthcare buck?