Forfeited FSA Balances — What’s an Employer to do?

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Under an employer-sponsored flexible spending account (FSA) plan, employees can elect to contribute a designated pre-tax amount of their annual salary to their personal healthcare FSA, dependent-care FSA or both.

For a personal healthcare FSA, the maximum amount they can contribute for the 2024 tax year is $3,200 (up from $3,050 in 2023). For a dependent-care FSA, the maximum amount is $5,000. And for a married employee, the $5,000 cap represents the highest amount that both spouses can together contribute.

But what happens to the money that isn’t used?

What you can and can’t do

Because FSAs have a strict “use it or lose it” mandate, employers have several options.

  1. You can simply keep the money
  2. If you don’t keep the money, forfeited amounts must be used to:
  • Defray expenses of administering the FSA
  • Reduce employee FSA salary reduction amounts for the following plan year
  • Add to your employees’ FSA coverage on a reasonable and uniform basis

Forfeited funds may not be returned to individual employees or donated to charity. If an employee terminates when their reimbursements for the year are greater than their contributions to that point, you may not withhold funds from their final paycheck or bill them for the difference.

 Exceptions to the rule

While the leftover balance generally reverts back to the employer, there are some exclusions:

  • An FSA plan can allow a grace period of up to two and a half months
  • A healthcare FSA plan can allow employees to carry over up to $610 of unused balances from one year to the next. (However, if the $610 carryover privilege is allowed, the healthcare FSA cannot also offer the grace-period deal.)
  • Dependent-care FSAs cannot allow the carryover privilege, but they can allow the grace period

FSA forfeitures total at least $3 billion per year. While the best-case scenario is that employees max out their funds for their own expenses, it’s important to understand your options.

 For tax planning guidance for your small business, call Magone & Company today at (973) 301-2300.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.