Workers Are Losing Over $4 Billion in Unspent FSA Money a Year

When Pamela Herd enrolled in a medical flexible spending account through her employer in 2024, she tried, as reasonably as she could, to forecast her family’s out-of-pocket health care costs for the upcoming year. Herd, a social policy professor at the University of Michigan, was certain she would have a handful of expenses: Her daughter has a heart condition that requires a lot of trips to her pediatrician.

“Even though I know that she's going to have a certain number of tests, I actually have no idea how much it's going to cost me,” Herd tells Money.

And what if she or her husband get sick?

“No one can predict that,” she says. “You’re just completely guessing.”

Flexible spending accounts, or FSAs, are tax-advantaged accounts that allow you to set aside a portion of your earnings (up to $3,300 for singles or $6,600 for couples in 2025) to offset certain out-of-pocket medical expenses. You pick this number in advance when you enroll, and a portion is deducted out of your paycheck throughout the policy year to fund the account.

The benefit is that the contributions lower your taxable income, and any eligible purchases you make with your FSA dollars are tax-free, providing a potentially sizable tax break that increases the higher your tax bracket.

The downside? There's a chance you lose money by miscalculating your health expenses. And the money left in the account after the “use-it-or-lose-it” deadline is forfeited back to your employer.

FSAs tend to have two deadlines. One is at the end of the calendar year; the other is at the conclusion of a grace period. For many, Saturday (March 15) is the final day to drain your FSA balance or forfeit the dollars forever.

While the spending deadlines have long been considered a flaw of FSAs, little is known about how much FSA money actually goes unspent each year. An exclusive analysis from Money shows that workers are losing billions of dollars annually due to the spending deadline provision. New research also suggests that, from the policy level, the accounts incentivize wasteful health care spending — and could raise health insurance premiums even if you don’t have an account.

“People are still going bankrupt because they’re in medical debt,” Herd says. “So when you have like $4 billion left on the table, something’s really wrong.”

Why Americans often forfeit FSA money

More than 20 million Americans with FSAs are tasked with predicting their medical costs each year in hopes of getting a tax break on their health care expenses.

But a growing body of research shows that Americans are not particularly good at these forecasts. According to the nonprofit Employee Benefit Research Institute (EBRI), about half of FSA holders in recent years have forfeited a portion of their contributions.

Herd, who specializes in examining the administrative burden required to access social programs, is among them.

One of her daughter’s pediatrician appointments was unexpectedly booked six months out. Now, with just days before her FSA spending deadline, Herd has been racing to use up her extra FSA funds. She anticipates still forfeiting around $500.

“Those guesses have real costs,” she says. “If you guess way too high, you lose that money. If you guess way too low, then you also lose the benefits.”

And even if you guess correctly, you’re not guaranteed to get the out-of-pocket expense covered. To get FSA coverage in real time, your employer must offer an FSA payment card, and the health care provider or store you're patronizing must accept it. If both aren’t true, you will have to pay upfront and then submit an itemized receipt later. (There’s an annual deadline separate from the spending deadline for you to submit these reimbursement requests, which must be verified before your FSA dollars are released.)

Due to these administrative hurdles, forfeitures are common, and the total amount of money lost has been ballooning recently. In 2023, the latest year for which FSA data is available, 47% of FSA holders forfeited money. The average forfeiture was $422 per account, according to EBRI data exclusively shared with Money.

We used these figures to calculate the amount of forfeitures for all accounts, relying on FSA-industry account estimates that place the total number of medical FSAs that year between 22.3 million and 23.3 million.

Overall, workers forfeited approximately $4.5 billion in 2023.

Using the same analysis for the 2022 tax year, forfeitures were higher, at $5.1 billion. That year, 52% of FSA holders forfeited some of their contributions. The average forfeiture was $441, according to EBRI, pushing total forfeitures above $5 billion for the first time ever.

These numbers are staggering, but they do come with caveats.

EBRI runs an FSA database containing over 3 million FSAs from various account providers. Since FSAs are so-called “fringe” employee benefits, the IRS and the Department of Labor do not track them as closely as, say, 401(k) accounts.

Given that limitation, FSAs have been a “blind spot” for researchers for years, Jake Spiegel, a health and wealth researcher at EBRI, previously told Money. EBRI’s growing database, which was created in 2020, is the only comprehensive look at FSA trends available at scale.

The latest forfeiture estimates are a notable increase from pre-pandemic norms. Money’s initial estimate of FSA forfeitures for 2019 was $3 billion. At the time, this figure far exceeded industry estimates, which typically put that number in the range of $400 million to $500 million.

On the individual level, it’s not a complete loss if you forfeit a small amount of your FSA dollars, according to Spiegel. In some cases, the tax benefits from the FSA may exceed the dollar amount you lost to the forfeiture. And about a third of employers offer a “roll over” option, which lets you carry over up to $660 for 2025 into the following year’s account. (Any amount above that is still forfeited.)

Rachel Rouleau, chief compliance officer for Health-E Commerce, which runs an e-commerce site called the FSA Store, says to Money in an emailed statement that she believes forfeiture estimates could be overstated. Similar to Spiegel, she notes that "even with the forfeiture risk, the majority of people still come out ahead by using an FSA, especially when you consider the estimated average 30% tax savings on contributions."

Will shopping sprees fix it?

Entire business models are sprouting up in hopes to tap into the billions of dollars languishing in FSAs. The FSA Store was one of the first companies to do so. Founded in 2010, the online shop stocks thousands of products that are guaranteed to be FSA-eligible.

Before the pandemic, FSA-eligible items were more strictly regulated by the IRS. FSA money was initially intended to help pay for copays, coinsurance, prescription drugs, eyewear and some medical equipment that health insurance didn’t cover. Then a COVID-19-era stimulus package drastically expanded the list of FSA-eligible items to include more everyday products such as activity tracker wrist bands, massage guns, face masks, menstrual products, Band-Aids and more.

With restrictions relaxed, Instacart, DoorDash and UberEats began accepting FSA payments in 2023. (Amazon has been accepting them since 2019.)

As FSA deadlines approach, these companies offer last-minute ways to spend down your FSA balance.

“Don’t lose your 2024 FSA funds,” an FSA Store ad reads about the upcoming March 15 deadline. “Spend now before they’re gone for good.” (Another ad, from Instacart in December, read: “How do you spend your remaining FSA funds in the next few crazy weeks on items that you actually need? Instacart makes it easy.”)

These options indeed make it easier to spend down FSA balances in a pinch, but some policy experts are beginning to question whether the underlying issues with FSAs are something a last-minute shopping spree can’t fix.

“FSA provisions certainly incentivize people to spend money on stuff they don't really need, like extra glasses at the end of the year,” says Sherry Glied, a health policy researcher and dean of New York University’s graduate school of public service.

Glied co-authored a study published in September by JAMA that analyzed the spending patterns of people with FSAs and HSAs as well as the associated tax expenditures for the government. The findings were stark: The accounts “primarily benefit high-income families, reduce the equity of the health care system and do not improve its efficiency.”

Speaking with Money, Glied says FSAs “are total losers” from a policy standpoint because they can encourage wasteful spending and lead to higher health insurance premiums. Her study found that people with FSAs spend 20% more on health care than people without. She says this overspending then drives up premiums across the board.

That’s because when people with FSAs overspend on health care, the employer is also picking up a portion of that spending through cost-sharing. Then the insurance policy costs more overall, and the premiums for all workers at the firm go up as a result.

And since FSA contributions and health insurance premiums aren’t taxed, this feedback loop results in a major tax expenditure for the government. According to Glied's study, each FSA amounts to a $1,306 government tax expenditure per year.

With over 22 million medical FSAs nationwide, that equates to nearly $30 billion annually — money that Herd says could go toward existing federal health care programs.

“It could be spent on Medicaid. It could be spent on Medicare,” Herd says. “It could be spent on current policies that we already have that help ensure people have access to health care and don't end up bankrupt.”

Of course, these big-picture policy issues won’t be resolved in the few days ahead of the FSA spending deadline. So for now, check your account and make sure you’re not leaving money on the table.

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