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What Happens if I Don’t Use My FSA Funds by the End of the Plan Year?

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Given the complexities associated with the health insurance industry in the United States, more people are turning to tax-advantaged alternatives like Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). Employers offer FSAs as part of a group benefits package. Unfortunately, funds in an FSA are subject to a “use-it-or-lose-it” rule, where unused funds are forfeited at the end of the plan’s term. Therefore, strategic use of FSAs considering this rule is crucial for maximizing the benefits of this type of account.

The Use-It-Or-Lose-It Basis of FSAs

Unused funds at the end of the plan’s term are forfeited and are no longer available to the employee. The employer may choose to apply these unused funds to the costs of administering the account or distribute them among other employees in the plan.

Typically, employees can contribute up to $2,550 to their FSA account. Fortunately, there are options available to employees with unused FSA funds. Depending on the specific plan involved, employees can either carry over $500 of the unused funds to the following year’s balance or take advantage of a grace period. The IRS allows one of these options to be available for the employee, but not both.

Carryover Option

In addition to the grace period, the IRS allows employers to offer a carryover option, which permits participants to roll over up to $550 of unused FSA funds into the following plan year. This carryover provision provides greater flexibility and ensures that participants have the opportunity to utilize their contributions effectively. However, not all employers choose to offer this option, so it’s essential to verify with your employer whether it’s available.

Grace Period

Some employers offer a grace period of up to 2 and a half months after the end of the plan year, during which participants can use remaining FSA funds. This grace period gives account holders extra time to incur eligible expenses and avoid forfeiting their contributions. It’s essential to check with your employer or FSA administrator to determine if a grace period is available and the specific timeframe.

Implications of Unused Funds

Unused FSA funds represent lost savings and missed opportunities to cover medical expenses tax-free. Failing to use your FSA funds by the end of the plan year or grace period means that you essentially forfeit the money you contributed, which can be frustrating and financially disadvantageous. To avoid this scenario, it’s essential to plan ahead and estimate your anticipated medical expenses carefully.

Maximizing FSA Benefits

To maximize the benefits of your FSA and avoid forfeiting unused funds, consider the following strategies:

  • Estimate Expenses Accurately: Calculate your expected medical expenses for the plan year and contribute an amount that aligns with your anticipated needs.
  • Take Advantage of Eligible Expenses: Familiarize yourself with the list of eligible expenses under your FSA plan and use your funds for qualified medical costs such as prescriptions, doctor’s visits, and medical supplies.
  • Plan Ahead: Utilize your FSA funds strategically throughout the plan year, taking advantage of opportunities to save on out-of-pocket healthcare expenses.
  • Review Plan Details: Understand the rules and options regarding your FSA plan, including any grace periods, carryover provisions, or deadlines for submitting reimbursement claims.

Our Agency’s Commitment to Your Peace of Mind

Selecting the right group benefits package for your employees can be challenging. For assistance crafting a comprehensive group benefits package with an FSA plan that honors your employees’ hard work and needs, get in touch with your local agent today. We can help you make the most of your FSA funds in an easy and collaborative process.

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