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Don't lose the funds in your FSA



Pictures of Money via Flickr Creative Commons

We're halfway through December and for those of you with Flexible Spending Accounts, that means it's time to take a close look at your balance and the terms of your account.

Here's why: Traditionally, FSA accounts had a "use-it-or-lose-it" rule, meaning you'd have to forfeit any money that you hadn't used for qualified health care expenses by the end of the year. That's changing, at least at some companies. (More on that below.)

But, still, you wouldn't want to lose any money you've squirreled away, right? 

The basics

FSAs are available through some job-based health plans. You can put up to $2,550 into your account each year; you don't have to pay taxes on this money. (Healthcare.gov has a good explanation of these accounts.)

You can use the funds for certain out-of-pocket health care costs, like co-pays, deductibles, some prescription drugs and some health procedures. Here's the a searchable list of health care products and services you can pay for using your FSA, courtesy of WageWorks, which administers FSAs and other accounts for 45,000 employers.

One of the advantages of an FSA is that it allows you to budget for your family's health care expenses. For example, if you know you will need laser eye surgery in the coming year, your spouse will need hearing aids, or your child will need orthodontics, you could set aside up to $2,550, pre-tax, to help pay for the procedures.

The unpredictable future 

For about three decades, the challenge with FSAs was that you had to budget for health care pretty carefully, due to that "use-it-or-lose-it" rule. And that likely dissuaded some people from using these accounts, says Sander Domaszewicz, a senior consultant with Mercer.

"It's hard to predict how much health care you're going to use in the future," Domaszewicz explains. He adds: "Behavioral science tells us that loss aversion is a powerful motivator: You hate to give up something you've earned."

Mercer, a global consulting firm, conducted a national survey of employer-sponsored health plans in 2014, finding that while 88 percent of large employers offer FSAs, the average employee participate rate is just 22 percent.

The 'direction of choice'

But the use-it-or-lose-it provision is becoming less of a barrier: The federal government amended the rule in October 2013, giving employers the option of allowing their employees to carry over $500 of unused funds into the next year.

This provision provides some peace of mind to employees, but it doesn't protect them from losing money altogether: If your employer has adopted the carryover provision, you still have to be careful that you don't end the year with more than $500 left in your FSA.

Employers have another option: Instead of offering the carryover policy, they can choose to offer their employees a grace period of two-and-a-half extra months to spend the money in their FSA. Employers can't offer both the carryover rule and the grace period; they could also choose to offer neither.

Employers are just now learning about the carryover rule, and Domaszewicz says it seems to be the "direction of choice" for employers offering FSA accounts.

In a survey conducted this year, 60 percent of employers offering FSAs said they opted to offer the carryover provision, while 23 percent said they chose to offer the grace period, according to this article published by the Society for Human Resource Management. 

"We've reached the tipping point where carryover is far more the standard provision than 'use it or lose it,'" says Jody Dietel, chief compliance officer for WageWorks. More than half of her firm's clients have adopted the carryover rule, she adds.

Don't 'lose it!'

To recap: You have until the end of December - or mid-March if your employer offers the grace period - to use the funds in your FSA. If your employer offers the carryover provision, then you need to make sure you have no more than $500 left in your account at the end of the year.

So how do you do this? You could go on a shopping spree at FSAstore.com, where everything sold on the site is a qualified FSA expense. You could also get a new pair of glasses, or visit an acupuncturist or chiropractor. This Chicago Tribune article offers even more ideas for how to spend your remaining FSA bucks.

Otherwise, you'll lose the money. And do you know where it goes?

… drumroll, please…

It goes to your employer!

But, "nobody's making a windfall off of this at all," Dietel says, noting that employees on average forfeit less than $100 a year. And, she points out, "it's not like the employer can throw a Christmas party with it, or something."

Rather, Dietel says, any leftover money must go toward the cost of administering the FSA program. It helps cover the costs associated with your company's FSA – things like debit cards, financial statements and call centers.

Also, "employees who leave [their jobs] throughout the year and maybe have spent all of their funds have cost the employer more funds than have been contributed," she says, so forfeited funds, "are often used to offset those administrative expenses."

What's your experience using an FSA? Tell us about it in the comments section below or e-mail us at Impatient@scpr.org.