In theory, flexible spending accounts (FSAs) sound great: They save you money on health expenses and income taxes — precisely what you’re looking for from your employee benefits package. So why have there been reports that employees lose money on their FSAs?
Unfortunately, FSA financial losses do happen often. It all comes down to IRS rules, your employer’s FSA policies and how you allocate money to your FSA. The good news is that you can influence the latter two aspects to minimize or eliminate your losses. We’ll explain how FSAs work, why you may lose money on them and how to prevent FSA financial losses.
When you enroll in a healthcare FSA that your employer offers, you can defer pretax income to use for approved health expenses. According to IRS rules, the maximum pretax income you can defer from your paycheck to your FSA in 2023 is $3,050. The IRS changes the amount in most, but not all, years.
Here are some pertinent FSA facts you should understand:
The key appeal of FSAs is that you pay no income taxes on your FSA contributions. This can save you serious money. Additionally, you’ll always have funds set aside for healthcare expenses. Financially, it’s a win-win — if you go about it correctly.
The catch with FSAs is that the IRS requires you to spend all the money you’ve contributed by the end of your plan year. Typically, this deadline is Dec. 31 of the calendar year. Any money remaining in your account after this date goes back to your employer.
This FSA rule is why, in 2020, 48 percent of employees with FSAs lost money on their accounts, with a $408 average loss, according to the Employee Benefit Research Institute. Across all employees, this loss totaled $4.2 billion.
However, with the proper steps and your employer’s help, you can avoid losing money on your FSA.
Although employees collectively lose billions of dollars annually on their FSAs, you don’t have to be one of them. Here’s how you can avoid losing money on your FSA.
IRS rules allow employers to loosen up the FSA year-end deadline a bit.
“When employers choose to offer an FSA, they have the choice to offer a grace period or rollover under their plan,” said Mark Haessly, managing director of product management at HSA Bank. “But, per IRS rules, they cannot have both.”
You can ask your employer to implement rollovers or a grace period to minimize your FSA losses. Without your employer formally going through the steps to do so, these options are unavailable. Once you have these options, you’ll likely find it much easier to use all of your FSA funds.
“Although slightly different, each of these options helps employees spend any unused FSA dollars to avoid forfeiting them,” Haessly said.
In nearly all cases, you’ll access your FSA via an online portal. You can turn on notifications within these platforms to stay abreast of upcoming FSA deadlines. Taking action based on these notifications can minimize or eliminate your financial losses.
“Employees should sign up for any email or text alerts that their administrator may offer in their web portals so they are aware of any important reminders,” Haessly advised, adding that reminders about end-of-year spending deadlines and filing dates are particularly crucial.
Bryttani Graddick, CEO and founder of Talented Teams Consulting, agreed with Haessly but put the onus on employers rather than employees.
“My team emails all FSA participants with active FSA dollars above the rollover limit once each quarter,” Graddick said. “These reminders help these dollars stay front of mind for the employee and reduce the complaints at year-end or after the grace period.” Graddick added that it’s also helpful to send quarterly emails reminding employees to log in and check their balances. “Yes, it’s a little more work, but employees appreciate this assistance,” she said.
Ask your employer or HR manager to send quarterly emails alerting you to remaining FSA funds over the rollover limit or reminding you to check this information yourself. The more aware you are, the less likely you are to lose money.
Avoiding excess funds in your FSA is crucial. But what is the right amount to put aside in an FSA?
“I would advise employees to look back at their medical expenses from the prior year to gauge what they might spend in the coming plan year, especially if they had regularly occurring treatments or prescriptions,” Haessly said. “Additionally, employees should anticipate any future medical expenses they may need and factor those in as well. For example, if someone wears eyeglasses or contact lenses, these expenses are much more predictable, which helps optimize their contributions.”
No matter what, however, determining the precise amount to contribute is tricky, Haessly said. He recommended using an online FSA calculator to make a reasonable estimate.
Just like tracking business expenses, tracking your FSA spending is an excellent way to ensure you use all account funds by the plan year’s end. This might sound tedious, but the online FSA portal makes it easy.
“Most employees, depending on the administrator, will have access to an online portal, where they can view their accounts, submit expenses for reimbursement, as well as track their FSA spending,” Haessly explained. “And, for employees who don’t always have access to a computer, many administrators offer mobile apps to accommodate the growing number of smartphone users, allowing users to easily access these resources.”
Technically, under IRS regulations, you must provide receipts for most expenses you cover through your FSA. While it’s relatively unlikely that the IRS will actually contact you or your employer to request these receipts, it’s still a best practice to keep them. In addition to being good for compliance, it’s a great way to track your FSA funds. Keeping tabs on your spending can help you deplete your funds before your plan year ends.
Haessly noted that some expenses don’t require receipts to be FSA-eligible. These include prescriptions picked up in person at a national pharmacy retailer and, in some cases, copays and recurring medical expenses. Nevertheless, you’ll likely find it helpful to keep receipts for these purchases. When you know how much you’ve spent on each FSA-eligible purchase, you’ll know you’re on your way to using your money on time.
Wasting money must be avoided at all costs, especially because many of today’s workers are drowning in debt. Working with your employer to set up FSA grace periods or rollovers and staying on top of deadlines can nip monetary losses in the bud. It’s also crucial to allocate reasonable amounts to your FSA and to track your spending, especially through receipts.
Taking these steps will help you do more than avoid losing money. Because the funds you set aside don’t have income tax levied, you’re effectively increasing your take-home pay when you properly manage your FSA. With the right safeguards in place, you can truly make the most of your FSA.