Losing Hundreds in FSA Funds? How to Save Your Money

Each year, millions of American workers inadvertently forfeit substantial sums from their Flexible Spending Accounts (FSAs), collectively totaling billions of dollars in unused pre-tax contributions. This persistent issue, highlighted by recent data, underscores a critical challenge in employee benefits utilization and financial planning. In 2024 alone, the typical forfeiture from an FSA was $404, according to the latest research from the nonprofit Employee Benefits Research Institute (EBRI). While this figure represents a slight decrease of $32 from the previous year’s average of $436, it marks the fifth consecutive year that average forfeitures have exceeded $400. This trend indicates a systemic problem where a significant portion of the workforce struggles to fully leverage a valuable benefit designed to ease healthcare costs.

Understanding the Flexible Spending Account (FSA)

Flexible Spending Accounts are a cornerstone of many employer-sponsored benefits packages, offering a tax-advantaged way for employees to pay for eligible out-of-pocket healthcare expenses. Introduced in 1978 as part of the Revenue Act, FSAs gained prominence as a mechanism to help workers manage rising medical costs. The fundamental appeal of an FSA lies in its tax benefits: contributions are made with pre-tax dollars, reducing an employee’s taxable income, and withdrawals for qualified medical expenses are entirely tax-free. This dual tax advantage can lead to significant savings, particularly for those in higher tax brackets.

There are primarily two types of FSAs:

• Health Care FSA (HCFSA): Used for medical, dental, and vision expenses for the employee, spouse, and dependents. This is the most common type.
• Dependent Care FSA (DCFSA): Used for expenses related to the care of a child under 13 or an incapacitated spouse/dependent, enabling the account holder to work.

A lesser-known variant is the Limited Purpose FSA (LPFSA), which is typically offered alongside a Health Savings Account (HSA) and is restricted to dental and vision expenses, allowing the individual to contribute to both an HSA and an FSA.

The Internal Revenue Service (IRS) sets annual contribution limits for FSAs. For the 2024 plan year, the maximum amount an employee could contribute to a Health Care FSA was $3,200. These contributions are deducted from an employee’s paycheck in equal installments throughout the year, meaning the funds are available upfront, even if not yet fully contributed. This "uniform coverage" rule is a key feature, providing immediate access to the full election amount at the beginning of the plan year.

The "Use-It-Or-Lose-It" Rule: A Double-Edged Sword

Despite their clear financial advantages, FSAs are governed by a strict "use-it-or-lose-it" rule. This regulation, inherent to the design of FSAs, stipulates that any funds remaining in an account after a specified deadline — typically the end of the plan year — are forfeited back to the employer. This crucial drawback forces account holders to accurately predict their medical expenses for the upcoming year, a task often fraught with uncertainty. The difficulty in forecasting healthcare needs, which can fluctuate unpredictably due to illness, accidents, or changing family circumstances, is a primary driver of forfeiture.

The "use-it-or-lose-it" rule was originally designed to prevent FSAs from functioning like savings accounts, ensuring they serve their intended purpose of covering current-year healthcare expenses. However, its stringent nature has consistently led to significant financial losses for employees.

The Alarming Scale of Forfeiture: Data and Economic Impact

EBRI’s research, which analyzes a vast database of over 3 million FSA accounts, reveals that approximately 40% of FSA holders forfeited at least some of their contributions in 2024. While the average individual forfeiture of $404 is substantial, the aggregate impact is staggering. Previous analyses have estimated that workers collectively forfeit between $4 billion and $5 billion of unspent FSA money each year. This colossal sum represents a tangible economic loss for millions of households, diverting funds that could otherwise be used for essential goods, savings, or investments.

It is important to clarify that the true financial loss to the employee is somewhat less than the forfeited dollar amount, owing to the initial tax savings. For instance, if a worker in a 12% federal income tax bracket contributed $1,000 to an FSA, they would initially save $120 in federal taxes. If they then forfeited $404, their net loss would be $284 ($404 – $120). For individuals in higher tax brackets, the tax benefit is proportionally greater, potentially offsetting a larger portion of the forfeiture. However, even with this tax advantage, any forfeiture signifies that the account holder did not fully realize the intended benefits of their FSA.

Jake Spiegel, senior research associate, health and wealth at EBRI, commented on the findings in a recent news release: "The decline in average forfeitures is encouraging. Still, the findings point to opportunities for employers to help workers better manage unused balances." His statement underscores the ongoing need for improved employee education and more robust support systems from employers.

Navigating the FSA Calendar: Deadlines and Mitigating Options

The timeline for FSA utilization is critical. While employers typically align their FSA plan years with the calendar year, ending on December 31st, two IRS-sanctioned provisions can offer some flexibility, though their implementation is at the employer’s discretion:

1. Grace Period: Employers can offer a grace period of up to 2.5 months immediately following the end of the plan year. This extends the spending deadline, typically to March 15th of the following year, allowing employees extra time to incur eligible expenses.
2. Carryover Provision: Introduced by the IRS in 2013 (initially capping at $500), the carryover rule allows employees to roll over a limited amount of unused FSA funds into the next plan year. For the 2025 plan year, the maximum carryover amount is $640 (this amount is indexed annually for inflation). An employer can choose to offer either a grace period or a carryover, but not both for the same plan year.

These provisions were implemented to address the harshness of the original "use-it-or-lose-it" rule and provide employees with a buffer against unforeseen circumstances. However, the discretionary nature of these options means that not all employers offer them, and employees must actively ascertain their specific plan’s rules. Ignorance of these deadlines and options is a significant contributor to forfeiture. Moreover, employees changing jobs must be particularly vigilant, as FSA funds typically cannot be transferred between employers, and a departure often triggers an earlier spending deadline.

Why Forfeitures Persist: Challenges and Expert Critique

Several factors contribute to the high rates of FSA forfeiture:

• Difficulty in Predicting Costs: Healthcare expenses are inherently unpredictable. While routine check-ups and known prescriptions can be factored in, unexpected illnesses, injuries, or new diagnoses can drastically alter projected spending.
• Lack of Awareness of Eligible Expenses: Many employees are unaware of the vast array of items and services eligible for FSA reimbursement, ranging from prescription medications and co-pays to less obvious items like acupuncture, chiropractor visits, breast pumps, contact lens solutions, and even sunscreen with an SPF of 30 or higher.
• Forgetting Deadlines: Amidst busy work and personal lives, remembering specific benefits deadlines can be challenging, especially if an employer does not provide consistent reminders.
• Complexity of Rules: The interplay of contribution limits, eligible expenses, grace periods, and carryovers can be confusing for the average employee.

The persistent forfeiture issue has drawn scrutiny from health policy experts who question the overall efficacy and fairness of FSAs. Sherry Glied, a healthcare researcher and dean of New York University’s graduate school of public service, is a vocal critic of these accounts. In a 2024 study co-authored for JAMA Health Forum, Glied and her colleagues found that FSAs may incentivize wasteful healthcare spending and represent a substantial tax expenditure for the federal government due to forgone revenue from untaxed income.

Glied previously articulated her strong opposition to Money, stating, "FSA provisions certainly incentivize people to spend money on stuff they don’t really need. They are total losers." Her argument posits that the pressure to deplete funds by year-end can lead individuals to purchase unnecessary medical items or services simply to avoid forfeiture, thus contributing to inefficiency in the healthcare system. This perspective highlights a fundamental tension: while FSAs offer tax relief and encourage proactive health management, they can also lead to suboptimal spending behaviors under the "use-it-or-lose-it" constraint.

Conversely, proponents of FSAs argue that they are a vital tool for making healthcare more affordable and accessible. They contend that the tax advantages significantly reduce the financial burden of out-of-pocket costs, particularly for families and individuals with chronic conditions. They also emphasize that, when managed effectively, FSAs encourage preventative care and responsible budgeting for health expenses. The challenge, therefore, lies in maximizing these benefits while mitigating the risks of forfeiture.

Strategies to Mitigate Forfeiture and Maximize FSA Benefits

For employees participating in FSAs, proactive planning and diligent management are paramount to avoiding forfeiture. Here are actionable strategies:

• Accurate Estimation of Annual Expenses: Before the annual enrollment period, review past medical expenses (doctor visits, prescriptions, dental work, vision care) to establish a baseline. Anticipate any known future expenses, such as planned surgeries, orthodontic treatments, or new prescriptions. Factor in routine check-ups, flu shots, and over-the-counter medication needs.
• Thorough Understanding of Eligible Expenses: Do not assume eligibility. Consult your plan administrator’s list of eligible expenses, which often includes a comprehensive guide. The IRS Publication 502 ("Medical and Dental Expenses") also provides a detailed overview. Many FSA administrators also offer online tools or marketplaces (FSA Store, FSA Eligible) that list qualified products and services. Beyond co-pays and prescriptions, consider items like:
  • Bandages, first-aid kits
  • Reading glasses, contact lenses and solution
  • Sunscreen (SPF 30+)
  • Acupuncture, chiropractic care
  • Crutches, wheelchairs
  • Feminine hygiene products
  • COVID-19 tests, masks, hand sanitizer
  • Therapy, mental health counseling
• Monitor Your Balance Regularly: Keep track of your FSA balance throughout the year. Most plan administrators provide online portals or mobile apps for easy access to your account information. Regular monitoring allows you to adjust your spending strategy as the year progresses.
• Strategic End-of-Year Spending: If you find yourself with a remaining balance as the deadline approaches, strategically plan purchases.
  • Schedule Appointments: Book routine doctor, dentist, or optometrist appointments, annual physicals, or eye exams for late in the plan year.
  • "FSA Shopping Spree": Purchase eligible over-the-counter medications, first-aid supplies, pain relievers, cold and flu remedies, contact lens solution, or even a new pair of prescription glasses or sunglasses. Many online retailers offer dedicated FSA-eligible sections.
  • Consider Durable Medical Equipment: If needed, items like blood pressure monitors, heating pads, or humidifiers are often eligible.
• Understand Your Employer’s Specific Rules: Clarify whether your plan offers a grace period or a carryover option, and what the specific deadlines are for incurring expenses and submitting reimbursement claims. These deadlines can differ.
• Qualifying Life Events: Be aware that certain "qualifying life events" (e.g., marriage, divorce, birth or adoption of a child, change in employment status) may allow you to change your FSA election mid-year. This flexibility can be crucial if your healthcare needs or dependent care costs change unexpectedly.

Broader Implications and the Future of FSAs

The ongoing challenge of FSA forfeitures has broader implications for employee financial wellness, employer benefits design, and public health policy. For employees, the loss of hundreds of dollars annually can represent a significant setback, particularly for low-income workers or those living paycheck to paycheck. It can erode trust in employer-sponsored benefits and discourage participation in valuable tax-advantaged programs.

For employers, high forfeiture rates suggest that their benefits offerings are not being fully utilized, potentially diminishing the perceived value of their compensation packages. Employers have a vested interest in educating their workforce about FSAs and providing tools to prevent forfeiture, as a well-utilized benefits package contributes to employee satisfaction and retention. This can involve clearer communication during enrollment, more frequent reminders about deadlines, and easier access to eligible expense lists and balance information.

From a policy perspective, the debate surrounding FSAs, particularly Sherry Glied’s criticisms, highlights the tension between providing tax incentives for healthcare and ensuring efficient spending. The federal government foregoes billions in tax revenue through FSAs, and if a significant portion of these funds is either forfeited or spent on unnecessary items, it raises questions about the optimal design of such programs. This discussion often leads to comparisons with Health Savings Accounts (HSAs), which offer even greater flexibility as funds roll over year to year and can be invested, making them a more robust long-term savings vehicle for healthcare. However, HSAs are only available to those enrolled in high-deductible health plans (HDHPs), limiting their accessibility.

In conclusion, while Flexible Spending Accounts offer a valuable opportunity for workers to save on healthcare costs through tax advantages, the persistent issue of forfeited funds demands greater attention. The average forfeiture of $404 in 2024, contributing to billions lost annually, underscores the critical need for employees to engage actively with their benefits. By meticulously planning, understanding eligible expenses, monitoring account balances, and leveraging available grace periods or carryover options, individuals can maximize the benefits of their FSA and ensure that their hard-earned pre-tax dollars are spent on their health, not forfeited back to their employer. The responsibility lies with both employees to be informed and proactive, and with employers to provide comprehensive education and user-friendly tools that empower their workforce to navigate this essential financial benefit effectively.