Q: I know I have to use my flexible spending account money on health care expenses before the end of the year, or I’ll lose it. But where does my unused money go? Who gets to keep it?
A: Your employer can (and probably does) keep any FSA money that you don’t spend by the deadline, says Paul Fronstin of the Employee Benefit Research Institute.
To back up for a minute: FSAs, known officially as flexible spending arrangements, can be a great way for employees to save on health care, if used efficiently. You can elect to save a certain amount from your paycheck every month, pre-tax, to spend on a long list of eligible medical expenses. Since you can contribute up to $2,550 to the account, the tax savings can be significant. Someone who pays 30% in federal and state taxes and contributes the max could save $765.
The downside, as you said, is that you’ll lose any money you contribute but don’t spend in a given year.
Even so, don’t be so quick to assume that your boss is profiting off your unused FSA funds. For one thing, if your employer keeps the money, the funds must go toward administering the FSA program.
Keep in mind that your employer assumes some financial risk when you open an FSA. While you contribute a bit to your FSA every pay period, you have access to the entire pot of money from the start — and if you quit before you fully fund the account, your employer has to eat the loss. “Both you and the employer are at risk,” Fronstin says. “The employer is allowed to keep any money that’s forfeited to cover those losses.”
He offers this example: You could decide during open enrollment to put $1,000 in an FSA for 2016. Then on Jan. 2 — before you get your first paycheck of the year — you might get Lasik eye surgery, using the $1,000 in your FSA to cover the cost.
But let’s say you decide to quit your job on Jan. 6. Your employer couldn’t force you to pay back the $1,000 you spent, even though you never contributed a cent to the account.
Employers are also allowed to give unused money back to workers — but there’s a catch. HR cannot just refund you whatever is left in your account. Rather, employers are allowed to pool everyone’s unused FSA dollars and divide the total among employees, Fronstin says. (There’s little research about how many employers actually do this; if yours does, consider yourself lucky.)
If you still have money sitting in your FSA this year, and won’t be able to spend it, you might have some flexibility with the deadline. Employers are now allowed to offer a grace period until March 15, or let employees carry over $500 in unused funds to the next year — although they can’t do both. Ask HR if you have either option.
Finally, if there’s a bit of money left in your account on deadline day, don’t worry too much, Fronstin says. “If you put $2,500 in the account and you’re losing $300, you’re still better off compared to not participating at all — because of the tax break,” Fronstin says. At that 30% tax level, remember, you’d still be coming out more than $400 ahead. “That’s just another way of thinking about the benefit of the account,” Fronstin adds.