A flexible spending account (FSA) is a type of tax-advantaged financial account. Some employers offer FSA accounts to their employees to help offset their medical costs using pre-tax dollars. FSAs are similar to the Health Savings (HSAs), but FSAs are only available to those employed by a company. Self-employed individuals have access to HSAs.
- A flexible spending account (FSA) is a type of tax-advantaged financial account; some employers offer FSA accounts to their employees to help offset their medical costs using pre-tax dollars.
- FSAs do expire; any money deferred into an FSA during the calendar year is forfeited if it is not claimed by the expiration deadline.
- For 2020 and 2021, the maximum salary reduction a person can put toward an FSA is $2,750.
With an FSA, employees typically contribute a set amount each paycheck from their gross pay; these contributions are tax-free, as long as the funds are used for qualified medical expenses. The Internal Revenue Service (IRS) defines what is considered a qualified medical expense in Publication 969.
FSAs do expire; they can be considered a "use it or lose it" type of plan. Any money deferred into an FSA during the calendar year is forfeited if it is not claimed by the expiration deadline. For 20201 and 2021, the maximum salary reduction a person can put toward an FSA is $2,750.
In light of the COVID-19 pandemic, Congress passed the Consolidated Appropriations Act, 2021 that offers more discretion for FSA and dependent care assistance programs. The Act allows for more flexibility when it comes to carrying over unused balances from plan years 2020 and 2021, as well as extending permissible grace periods for these plan years.
In 2018, there were an estimated 33 million to 38 million FSA accounts, according to the Employment Benefits Research Institute. In addition, according to WageWorks, a leading administrator of FSA accounts, roughly 8% of FSA owners leave on average $172 in their accounts at the end of a year.
Grace Period or Carryover
While unclaimed monies in an FSA account are typically forfeited at the end of the year, some plans may offer a grace period or carryover. A grace period is a certain amount of time in which the employee may submit a claim that may go past the end of the calendar year; the grace period tends to be around two to three months, so if it expires in January, you will need to spend those funds by mid-March. Unfortunately, once the grace period expires, all unused balances are forfeited.
Some FSA plans also offer a carryover, where plans may allow up to $500 to be used for the following year's expenses. The FSA plan specifies this limit, and it may be less than the maximum of $500.
Use Your Funds by Year's End
It is possible to be caught off guard by the clock on your FSA funds. The end of the year can be a great time to use up your funds. But there are many options for using your funds even at the last minute. Call your doctor's and set up any appointments that you put off, or get your teeth cleaned—both are typically covered by FSAs. Some FSA plans also allow employees to purchase household medical supplies, like saline solution, bandages, first aid kits, sunscreen, and travel sickness bands. Hundreds of items available at the online FSA Store.
The Bottom Line
It is important to understand specifically how your FSA account works because every plan is different. The expiration dates for FSA accounts may vary, and some accounts have either a grace period or a carryover period; review your plan documents or call your plan provider to get further clarification.