Wondering what happens to unused FSA funds? Typically, any unspent money in a Health Flexible Spending Account (FSA) is forfeited at the end of the plan year. However, employers have options to help mitigate this, such as offering a grace period or carryover provision.
FSA Funds: Use It or Lose It
Unused FSA funds can be a source of confusion and frustration for many. Typically, any remaining balance in a Health FSA at the end of the plan year is forfeited to the employer.
This is governed by the Internal Revenue Service’s “use-it-or-lose-it” rule, which mandates that employees must use their FSA funds within the plan year to avoid losing them; any leftover FSA money is “lost” by the employee. This rule may lead to a scramble at the year’s end as employees rush to use their remaining funds on eligible expenses.
However, there are ways to extend the usability of Health FSA funds. Employers can offer a grace period or a carryover option – but not both. These options provide a cushion for employees and can allow them more flexibility in managing their remaining FSA dollars.
Grace Period
Employers may choose to offer a grace period of up to 2.5 months after the plan year ends. During this extension, employees can incur and submit eligible expenses, reducing the likelihood of forfeiting funds.
Carryover
Alternatively, employers can allow employees to carry over a limited amount of unused funds to the next plan year. The IRS sets the annual carryover limit, and this amount is adjusted periodically. This option can be particularly beneficial for employees who may not have immediate health care needs but anticipate future expenses.
Employer Options for Forfeited FSA Funds
Since forfeited FSA funds become the employer’s responsibility at the end of the plan year, employers must determine how to manage these funds in a way that supports their benefits strategy and complies with IRS regulations.
Employers may use forfeited funds to cover administrative costs related to the FSA program. Another option may be to redistribute forfeited funds among participants, provided that this is done equitably and in compliance with relevant regulations and guidelines.
Promoting Year-End FSA Usage
To help minimize forfeitures and support employee engagement, employers can take proactive steps to encourage FSA utilization. Consider the following strategies:
- Send timely reminders. Communicate key deadlines for incurring eligible expenses and submitting claims through platforms like email, text, newsletters and internal communication channels. Make sure to provide regular countdown messages as the plan year winds down.
- Host educational sessions. Offer webinars or lunch-and-learns that explain how FSAs work and highlight commonly overlooked eligible expenses.
- Provide eligible expense lists. Share easy-to-read materials that detail qualified expenses and provide clear instructions on how to submit claims.
- Promote FSA-eligible products. Highlight opportunities to use FSA dollars on eligible over-the-counter items, medical supplies and wellness products.
- Partner with a benefits broker. If your HR team doesn’t have the bandwidth to manage year-end outreach or other benefits-related tasks, consider working with a knowledgeable employee benefits broker who can provide comprehensive support, including plan design, enrollment, communication strategies, compliance assistance and more.
Planning for Next Year’s Contributions
Supporting employees with tools and guidance to forecast their health care expenses may lead to more accurate FSA contributions. Additionally, encouraging analysis of previous spending patterns can help employees to better align their elections with actual needs, which may reduce the likelihood of forfeitures.
How Higginbotham Can Help
Higginbotham is committed to helping employers create strong employee benefits offerings that balance cost control with comprehensive care. Our benefits specialists are here to provide year-round, personalized support so your company can offer a benefits package that both aligns with your organizational goals and enhances employee satisfaction.
