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Flexible spending account (FSA) holders forfeited an estimated total of $7.2 billion in 2019 and 2020, a much higher amount than previously estimated, according to new data obtained and exclusively analyzed by Money.

FSAs allow millions of employees to use pre-tax dollars for approved health-related expenses, including copays, prescriptions and over-the-counter medicines. The catch: If you enroll, IRS rules require you to spend the money you contribute into your account by an annual deadline. In other words, if you don’t use it, you lose it: the money is forfeited.

More than 40% of workers with FSAs forfeited at least part of their account contributions in recent years, according to new data that the nonprofit Employee Benefit Research Institute (EBRI) shared with Money. On average, they lost between $339 and $408 a year by not using up all of their FSA money by the spending deadline. All that forfeited FSA money isn't tracked closely by the federal government, and it's likely those billions of forfeited dollars ended up going right back into employers' pockets.

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For workers without predictable medical expenses, the spending deadline makes participating in an FSA plan a bit of a gamble. When enrolling, you must make an educated guess upfront as to how much money to put into your FSA (up to a max of $2,850 in 2022), based on how much you think you'll spend on eligible out-of-pocket health expenses throughout the year.

Employers often set the FSA spending deadline on Dec. 31, though many choose to give their workers a “grace period” of 2 1/2 months — pushing the ultimate deadline to March 15. (Let this be your reminder: Check your FSA balance and spending deadline.)

The “use-it-or-lose-it” design has long been considered a weakness of FSA plans, but it’s been hard, until now, to get a thorough assessment on just how much money workers were losing. In fact, Money’s estimate — that workers have forfeited at least $3 billion annually in recent years — is six times higher than older, more limited estimates from the FSA industry.

Workers lost billions to FSAs in recent years

About 40% of the private workforce has access to FSAs, according to the best government data available. But that figure says nothing about how many Americans actually sign up for FSAs.

Unlike wages and many other employee benefits, the government doesn’t run comprehensive surveys on FSAs, says William Sweetnam, a legislative and technical director for the nonprofit Employers Council on Flexible Compensation (ECFC).

Due to a lack of good data, exactly how much money workers contribute to FSAs, how much they spend, and how much they forfeit have been a sort of mystery — even for industry experts.

“They’re a little bit of a blind spot for researchers,” says Jake Spiegel, a health and wealth researcher at EBRI, who specializes in FSAs and health savings accounts.

In a bid to help fill that void, EBRI has started a new database that for the first time tracks millions of FSAs from various providers.

According to the new data, 44% of workers with FSAs in 2019 forfeited money. On average, the amount lost totals $339 per person. In 2020, those numbers went up: 48% forfeited, and the average amount was $408. (The 2020 figures may be a modest overestimation due to some temporary rule changes during the pandemic, Spiegel notes.)

Meanwhile, Americans had 20.2 million FSAs in 2019 and 21.6 million in 2020, according to data shared with Money from the financial research firm Aite-Novarica, which industry experts say is one of the only firms with a reliable estimate of the total number of FSAs.

With reliable data on how often workers forfeit, how much they forfeit and how many FSAs workers hold, we can now reasonably estimate that workers forfeited approximately $3 billion in 2019 and $4.2 billion in 2020.

The figures shine new light on the underreported FSAs, and despite the possibility of overestimated 2020 figures, the lower-range figure from 2019 alone shatters previous estimations.

It's often cited that workers with FSAs forfeit between $400 million and $500 million annually. Those figures come from the FSA Store, an e-commerce site that carries FSA-eligible items, and one of the only companies in the industry to have publicly calculated total FSA forfeitures.

But Zack Peckham, the vice president of strategy at Health-E Commerce, the parent company of the FSA Store, notes that those estimates are based on figures that are at least five years old.

Using more up-to-date numbers, Peckham says the company reran the estimation and found that Americans now forfeit about $1.4 billion to FSAs.

He called the estimate conservative, and noted that one major difference between his figure and Money’s boils down to estimates of how many FSA holders have unspent money in their accounts. He’s using a lower estimate — 22% — compared with EBRI’s new estimates that more than 4 in 10 workers forfeit money.

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What happens to unused FSA money?

Before FSA money becomes “forfeited,” workers have to miss their spending deadline. Each employer that offers an FSA has a few policy options that affect how spending deadlines work.

  1. Employers can allow workers to carry over $550 from 2021 accounts into 2022 accounts. (The rest would be forfeited.)
  2. Or they can offer a “grace period” of 2 1/2 months to allow workers more time to use up their money. Typically, FSA plans that end with the calendar year have a grace period that lasts until March 15.
  3. Or they offer neither option.

“That’s a hard ‘or,’” says Sweetnam, noting that employers aren’t allowed to offer a grace period and let workers roll over some of their unused money.

Here’s where those temporary rule changes come into play. The Consolidated Appropriations Act of 2021, a.k.a the third pandemic relief package, affects 2020 and 2021 FSAs. In short, the law allows employers to let their workers roll over all of their leftover FSA money into the following year's account; or employers can extend the grace period to 12 months, up from 2 1/2 months.

A big caveat with these new rules is that they are totally optional and when compared to other pandemic-era policies, these changes flew under the radar. FSA experts say they’re unsure how many employers implemented the new rules, but their hunch is that it wasn’t many. It’s impossible to tell for certain because of — again — data limitations. (Because it's hard to determine how many employers have loosened their FSA rules in 2020 or 2021, it's possible that 2020's forfeiture figures are an overestimation, since workers may still be able to spend that money later this year.)

Once all deadlines, grace-period extensions and carry overs pass, the remaining money officially becomes "forfeited." What happens then?

If employers are feeling generous, they can pool all the forfeited money together, divide it up by the number of workers who contributed to their FSAs and then distribute it equally. Or they may put the forfeited money toward the following year’s benefits, as they are allowed to “match” a certain amount of FSA contributions, similar to retirement plans.

While Spiegel says he can’t say for sure (surprise: lack of data), he expects that these options aren't very common.

A more likely scenario? “It’s just a foregone expense,” Sweetnam, with the Employers Council on Flexible Compensation, says.

In other words, workers can kiss their forfeited contributions goodbye. Companies that offer FSAs are allowed to pocket the forfeited money. Spiegel says it’s likely employers are putting at least some of that money toward the costs of administering the FSA benefits.

But there’s really no telling how employers use the leftover money because neither the IRS nor the Labor Department keeps track of it, leaving billions of dollars unaccounted for.

Avoiding forfeitures and other FSA tips

While these big-picture figures may sound alarming, what do they really mean for your money in an FSA?

In short, the risk of forfeiting some of your FSA money is a real one that you should take into consideration when choosing to participate in an FSA. But don’t let this factor alone keep you from enrolling. While the scope of forfeitures has been largely underestimated, FSA proponents say the accounts still have real perks — especially the tax benefits.

Your contributions reduce your taxable income dollar for dollar. So if you typically spend thousands of dollars on out-of-pocket health care costs each year and have a reasonable tolerance for paperwork, maxing out your FSA is a no-brainer.

If, however, you're unsure of your health care costs, it's worth it to sit down and try to project them before you simply plop money into an FSA. Also remember that you can spend your FSA dollars only on certain IRS-approved expenses. In addition to out-of-pocket costs like health insurance deductibles, copays and coinsurance, you can use FSA money on some items commonly found at drugstores.

“There’s more eligible products than there have ever been before because of the CARES Act,” says Peckham, of Health-E Commerce — noting that the pandemic legislation expanded the amount of products you can buy with FSA dollars to more than 10,000.

And because of the tax perks, Spiegel says even if you end up forfeiting some of your FSA funds, say $250, you may actually be in the clear because the tax benefits could cancel out the downside of losing $250 in some cases. How much of your forfeiture is truly lost depends on your tax bracket and your total FSA contribution.

Similarly, if your employer offers a carry over policy of $570 in 2022, you can safely contribute only that amount and not have to worry about forfeiting any money whatsoever. Because if you miss the spending deadline, $570 will roll over into next year’s account, should you choose to re-enroll.

“When people hear that they forfeited money in an FSA, they sort of interpret that as an unequivocally bad thing,” Spiegel says. “But it's actually important to keep in mind that people can participate in an FSA, forfeit money at the end of the year, and still come out ahead.”

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