If you have a Flexible Spending Account (FSA), you’re probably familiar with the term, “Use it or lose it.” The phrase is indicative of how FSA funds expire at the end of a 12-month plan year. The end-of-year Flexible Spending deadline means FSA-holders should check their FSA balances for remaining funds that that may be forfeited on the December 31st FSA deadline.
This year’s account balances are set to hit all-time highs following pandemic-era laws (see CARES Act) passed to allow FSA rollovers through to the 2023 plan year. As a result, experts estimate that up to $1 billion dollars may be forfeited to the FSA deadline.
As many people rush to spend their extra FSA dollars before the deadline, some inevitably forget to spend and end up forfeiting their funds… That begs the question – what happens to unused FSA funds?
What happens to my FSA funds when they expire?
Your employer will receive all unused funds and has several options on how to use the returned money. Most commonly, employers will use the funds to cover their FSA administration costs directly attributed to offering the FSA benefit. If the excess forfeitures extend beyond admin costs, the employer can simply keep the excess dollars with no rules around how the money is used. As Money.com puts it:
“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.”
It may seem unfair that your employer benefits from FSA forfeiture, but Flexible spending accounts are designed specifically to be spent on health needs within the plan year. This timeboxed period is intentional and was originally set in place to encourage employees to thoughtfully budget ahead for health expenses. This “push to plan” follows the similar logic for why employers offer 401k matching – they do so to encourage employee responsibility when saving for retirement.
A Generous Employer Option
Now this part may not make you feel any better (as it’s considered quite uncommon), but employers do have the option to act more charitably when it comes allocating forfeited FSA dollars. Employers can redistribute unused FSA funds to either:
- Reduce payments for employee FSA plans in the next plan year
- Add funds directly back into FSA accounts the following year.
The redistributions can be offered evenly to all employees (i.e., $100 forfeited among 10 employees = $10 for each employee next year). Alternatively, the redistributions can be proportioned to the total FSA contribution for each employee in the previous year (i.e., Individual employee $ contribution / Total $ contribution = Individual $ share for employee next year).
(See also: Did you know your employer can contribute to your 401k without an employee contribution to match?)
If you’ve lost funds in the past or you’re not reading this article until next year after you’ve lost your funds, make sure to ask your HR representative about your employer’s plan for all forfeited FSA funds.
Regardless of what your employer plans to do with your funds, it always helps to look to the bright side – you will not be taxed on the returned funds and your losses are limited due to lowered taxable income that comes as a result of contributing to the account in the first place.
Can an employer refund unused FSA funds?
No, not exactly. Employers cannot refund an individual's residual FSA dollars as it would violate the IRS “use-it-or-lose-it” rule outlined in Sec. 125. However, there is a lesser known (and little used) option for employers to return taxed funds in cash form to employees through evenly or proportionately distributed funds (see "A Generous Employer Option" section examples above).
This requires an employer to issue payment through payroll along with all associated payroll taxes. Don’t count on getting this from your employer because it is typically not logistically simple and can complicate the accounting process (Further by Health Equity).
What happens to your FSA funds if you quit your job or are fired?
Your FSA funds are only available to use during your employment with the employer that offered the FSA. Being that FSAs are employer-owned, you'll want to make sure that you spend any unused FSA funds prior to departing.
While you may have the luxury of planning ahead with a planned leave, that won't be the case with a job dismissal. However, if fired, you may have the option to seek a COBRA FSA that provides benefits past your departure. For more information, see the section: Continuation with COBRA on TheNest.com.
What happens to unused dependent care FSA funds?
Firstly, a dependent care FSA is like a traditional FSA in that it is use-it-or-lose it, but the qualified expenses differ. Dependent care FSAs can be used for an account-holder's dependents (which covers children under 13 or spouse who is mentally or physically unable to care for themselves).
The funds for dependent care FSAs are forfeited in the exact same manner as traditional FSAs. Your employer will take back all unused funds which may be used to cover administrative expenses or simply kept for any use they see fit. You may refer to the sections above for more details on an employer's options for unused funds.
Confusion around FSA vs. HSA unused funds
Many confuse the two accounts even though they are very different. The FSA sister account, the HSA, does not expire and actually belongs to you, the accountholder. This means that you keep the HSA funds year to year and from employer to employer. Don't fret when all your co-workers with FSAs are rushing to spend their funds because HSAs do not expire.