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Flexible Spending Accounts and the End-of-Year Spending Spree

As I write this post, the end of the year is fast approaching. I have visions in my head of HR employees going the extra mile to remind employees with flexible spending accounts (FSAs) to hurry up and spend any unspent funds so that they are not lost. After all, FSAs are use-it-or-lose-it accounts. Right? Not necessarily.

Federal regulations generally stipulate that money in an FSA is lost at the end of the year if not spent. But there are exceptions. In fact, employers are given two options for assisting employees so that they do not lose unspent funds. I wonder how many employers actually know about these options. I also wonder if their benefits brokers have explained the options to them.

The Basics of FSAs

Flexible spending accounts are unique financial accounts into which employees can contribute funds they will later use to cover qualified out of pocket medical expenses. They are generally offered in conjunction with high deductible health plans (HDHPs). They are similar to health savings accounts (HSAs) but with one major difference: the use-it-or-lose-it clause.

It is expected that employees will use all their FSA funds before the end of the current calendar year. For some employees, this is not a problem. They have regular healthcare expenses they pay for out of pocket. Even after utilizing FSA funds, they still have outstanding bills to pay. But for other employees, spending all the money in their accounts can seem like pulling teeth.

So why the use-it-or-lose-it clause? I don’t think anyone knows for sure. My guess is that government regulators do not want taxpayers using their FSA accounts as tax free investments. At any rate, not using up all of one’s FSA funds means losing them at the end of the year – unless employers step up with one of the two allowed workarounds.

2 Ways Around the Problem

There are two ways to get around the use-it-or-lose-it problem. Both lie with employers. The first is a grace period. To understand how this workaround helps employees, you first need to know that forfeited funds from FSA accounts almost always go to employers. That is kind of strange in the sense that employers might actually encourage their employees to not use FSA monies in hopes of reaping a windfall at the end of the year.

Nonetheless, the law allows employers to grant a grace period of up to 10 weeks. Employees are given the extra time to use their unspent funds before risking forfeiture. The grace period may still not help employees who have no need for medical services, but it could help others who are planning to seek out healthcare services during the first few weeks of the new year.

The other option is permitting rolling over. Granted, employees cannot roll over an unlimited amount of unspent funds, but they are allowed to roll over up to $610. If nothing else, employers should be offering that option.

It’s Time for More Education

From where I stand, it is time for more education regarding FSAs and how they work. Like so many other things related to employee benefits, I fear too many employees do not understand how their accounts function.

BenefitMall is a general agency that encourages benefits brokers to act as full-service brokers rather than offering just a limited number of basic services. To me, being full-service means making sure employees and employers have all the necessary information about their benefits – including the rules governing FSA accounts. People putting money into these accounts need every opportunity to spend the money on qualifying health expenditures.