Your company offers a Flexible Spending Account (FSA) that allows money to come out of your check before taxes and then you use that money to pay for eligible out-of-pocket healthcare expenses. In 2022 you can contribute up to $2850. Great deal, right?
But there’s a downside to Flex Spending Accounts. If you don’t use all the money by the end of the year, or March 15 of the following year if you have a grace period plan, you forfeit what’s left and your account goes back to zero. No matter which plan you have, it’s use-it-or-lose-it. So, it’s something of a gamble when you sign up for a Flexible Spending Account; will you be able to spend all the money you contribute?
The Employee Benefit Research Institute (EBRI) says the average amount forfeited ranges from $328 to $355 for each worker with a Flex plan. And while that’s what my grandpa would call “a right smart amount of cash” coming out of your pocket, it’s nothing when you add up all the money that gets forfeited; Money Magazine estimates it was $3 billion dollars in 2019 and $4.2 billion in 2020. Now that IS a big deal. And where does all that money go? Right back to the employers.
Before you forfeit Flex Spending money, you have to miss your employer’s spending deadline. The employer has three stand-alone options for the deadline:
- The employer can allow workers to carry over a certain amount from the previous year. In 2022, you could roll over $550 dollars. Anything above that amount was forfeited.
- The employer can offer a grace period of 2 ½ months (to March 15), giving employees time to use-it-or-lose-it.
- The employer doesn’t have to offer either option and anything left at the end of December 31 is forfeited.
Then what?
- The employer can put all the forfeited Flex Spending money into a pool that is divided up equally among everyone who has a Flex Account.
- The employer may put the forfeited money toward next year’s employee benefits. By law, employers are allowed to match a certain amount of employee FSA contributions.
- The most likely option, according to William Sweetnam at the Employers Council on Flexible Compensation is that the employer keeps the forfeited money, which they can legally do.
There’s no way to know what employers do with forfeited money they keep because neither the IRS nor the Labor Department keeps track of it.
Before you decide to put money into a Flexible Spending Account, here are some things to think about:
- Contributions to a FSA are tax-deductible and reduce your taxable income dollar for dollar.
- Even if you forfeit some money, do the tax benefits of your contributions outweigh the amount you forfeit? Ask yourself if you still come out ahead.
- You can’t spend Flex Spending money on all medical expenses. There is a list of eligible IRS-approved expenses. Check the list to see how much of your out-of-pocket expense is on the list.
- On average, how much do you spend on out-of-pocket medical expenses and how much do you estimate you’ll spend this year?
Flexible Spending Accounts—go into it with your eyes wide open.