Healthcare flexible spending accounts (FSAs) can be a valuable way for employees to set aside pre-tax dollars to pay for certain out-of-pocket healthcare expenses with minimal costs to you. But unlike health savings accounts (HSAs), an unused FSA balance generally doesn’t roll over from year to year. How can you help your workers utilize funds before the “use it or lose it” deadline? Let’s find out.
In this article, we’ll discuss what an FSA balance is, what happens to FSA money at the end of the year, and what employees and employers can do with the unused funds. After reading this, you’ll know how to help your workers maximize their FSA usage to help offset the cost of healthcare and related expenses.
What is an FSA balance?
When employees sign up for an FSA, they’ll indicate the amount they want to contribute through payroll deductions. To do that, they’ll sign a voluntary salary reduction agreement. For 2023, the maximum amount they can contribute is $3,050. Depending on your plan, you may also contribute to employees’ FSAs.
Either way, the funds are immediately available to the employee to use beginning at the start of the plan year. This money in an employee’s account is what’s known as an FSA balance.
What happens to FSA money at the end of the year?
The important thing employees need to understand about their FSA funds is that, if they don’t use them by the end of the plan year, they may have to forfeit them. What that means is that the balances revert back to you as the employer. We’ll discuss in a bit what your company can do with those funds.
There are, however, a couple of exceptions to this rule. These are:
- If your company offers a grace period of up to 2 ½ months that allows employees to use the funds for eligible expenses into the new plan year. This would give employees until March 15 to use their balances.
- If you structure your plan to allow up to a $610 (in 2023) rollover amount that they can move from one plan year to another.
You can either choose one or the other of these options, but not both.
On average in recent years, employees lost between $339 and $408 a year by not using their FSA balance. Since most employees don’t want to risk losing their money, it’s a good idea to be proactive and encourage workers to look for opportunities to spend down their balances.
What can employees use their FSA balance on?
If employees still have balances in their accounts near the end of the year or their grace period, you’ll want to help employees maximize their FSA investment to boost their satisfaction with the benefit. Several new categories have been added to the list of products and services that FSA money can be used for, which includes:
- Dental care
- Ambulance services
- Chiropractor
- Vision care
- Pregnancy, fertility, and family planning products
- Menstrual supplies
- Over-the-counter medications
- Acupuncture
- Weight-loss programs
- Acne products
- Psychiatric care
- Home care
- Lab fees
- Orthopedic shoe inserts
- Bandages
- Annual physicals
- Massagers such as foot or seat massagers
- Select light therapies
A full list of eligible expenses can be found in IRS publication 502.
Who else can use an employee’s FSA balance?
As you encourage employees to use up their remaining FSA balances, it’s a good idea to remind them that the balances can also be used for expenses incurred by their spouse – if they’re married – as well as their dependents.
What can I as an employer do with unused FSA funds?
If an employee ends up not being able to use their total FSA balance and if reverts to you, the IRS gives employers a couple of options for unused employee balances:
- Use the funds to defray FSA administrative costs incurred during the plan year
- Credit the leftover amounts to employees’ FSAs for the next plan year
- Return the amounts to employees on a reasonable and uniform basis
How to Best Encourage Employees to Use their FSA Balances
To optimize the value of your health flexible spending account benefit to your company and your employees, be sure to help them utilize their funds. Here are a few steps you can take.
- Clearly communicate the deadline for using FSA funds
- Make it easy to access their current FSA balance
- Share a list of eligible FSA expenses
- Remind employees that they can use their balances for their dependents’ expenses
Unused FSA balances are just one of the administrative tasks you’ll need to stay on top of if you offer a plan. Read our next article on FSA administration for other tips on how to keep your plan in compliance.
