Taxes

Workers Lose Billions Of Dollars In Flexible Spending Accounts

Taxpayers lose quite a bit of money in flexible spending accounts (FSAs) each year while trying to save a few tax dollars.

FSAs are fairly simple. Before the start of the year, an employee elects to defer part of his or her compensation into an FSA. The deferred amount is excluded from gross income for the year, avoiding income taxes.

During the year the employee can be reimbursed from the FSA for qualified medical expenses. The employee has to submit receipts and complete a reimbursement form. The reimbursements are tax free, so using an FSA allows an employee to convert some salary into tax-free income.

But if the employee’s expenditures aren’t qualified medical expenses, the FSA can’t reimburse them. If the employee’s qualified medical expenses for the year don’t at least equal the amount deferred into the FSA, the balance left in the account reverts to the employer.

The employer can adopt a provision that allows the employee to either rollover the balance to the next year or use the leftover balance to be used to reimburse some medical expenses incurred early in the next year. But the employer doesn’t have to allow these options, and even if it does there’s a limit to the balance that can be treated these ways. With few exceptions, the employee loses the leftover balance.

The government doesn’t compile much data on FSAs and how much money is forfeited to employers.

But the Employee Benefit Research Institute (EBRI) says it has been able to obtain a lot of data on FSAs.

EBRI found that in 2019, 44% of workers with FSAs forfeited at least some of their money. On average, the workers lost $339. In 2020, 48% of workers forfeited some money, with the average forfeit being $408.

Money.com did the arithmetic using an estimate of the number of FSAs in existence and concluded workers in aggregate forfeited $3 billion in 2019 and $4.2 billion in 2020.

Employees who enroll in FSAs need to make reasonable estimates of their qualified medical expenses before the start of the year. Then, monitor the account balance throughout the year. Save receipts and other proof of qualified medical expenses and submit reimbursement claims in a timely manner. In the last quarter of the year, schedule elective medical treatment to ensure a portion of the FSA balance isn’t forfeited.

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