Healthcare Flexible Spending Accounts (or Healthcare FSAs) can be a great way to help your employees pay for covered medical expenses. But what happens if they don’t use all their funds by the end of the plan year?
Quick Reminder: How Healthcare FSAs Work
A Healthcare FSA is a tax-advantaged account that allows employees to save for eligible healthcare costs for the current plan year. Employees and the employer may contribute to the account. The full election amount is available on the first day of the plan year, fronted by the employer, and employee contributions are withheld from their paychecks throughout the year.
These funds are subject to “use or lose” rules, meaning employees must generally use the funds by the end of the plan year or forfeit the remaining amount.
What happens to that remaining balance?
As the employer, you assume a certain amount of risk when offering a Healthcare FSA since you’re funding them upfront. If an employee uses all the funds at the beginning of the year then terminates employment, you can’t recoup the money from the employee.
But if an employee overestimated medical needs and has money left over, you can’t directly refund it (at least not to the individual). Instead, you have a few other options.
Put It Back into the Pool
Although other options may be available for certain employers, any plan may use the forfeited funds in one of three ways:
- It can be put toward administrative expenses related to the FSA program.
- It can be used to reduce employee contribution amounts for all participants for the next plan year.
- It can be given as a cash refund to all employees on a reasonable and uniform basis, not just to employees with leftover funds.
A Little Extra Time
Another option is to offer either a carryover or grace period to give employees more time to use their funds. The Internal Revenue Code regulations define how these options work:
- The carryover option: “An employee can carry over up to $500 of unused funds to the following plan year. For example, an employee with unspent funds at the end of 2019 would still have those funds available to use in 2020.”1
- The grace period option: “An employee has until two and a half months after the end of the plan year to incur eligible expenses. For example, March 15, 2020, for a plan year ending on Dec. 31, 2019.”2
You don’t have to offer either option, but if you choose to, you can only offer one and not both.
Navigating FSA options can be tricky, but we’re happy to help. Reach out to your American Fidelity account representative or contact us online.
More on Healthcare FSAs and other reimbursement accounts:
- FSA Mistakes to Avoid: Spouse & Dependent Rules
- FSA Mistakes to Avoid: Other Reimbursement Accounts
- FSAs, HSAs, and HRAs – What You Need to Know
- Steps to Take When Healthcare FSA Participants Terminate Employment
1“IRS: Eligible employees can use tax-free dollars for medical expenses” IRS.gov, November 15, 2019, https://www.irs.gov/newsroom/irs-eligible-employees-can-use-tax-free-dollars-for-medical-expenses
2“IRS: Eligible employees can use tax-free dollars for medical expenses” IRS.gov, November 15, 2019, https://www.irs.gov/newsroom/irs-eligible-employees-can-use-tax-free-dollars-for-medical-expenses