Workers will forfeit as much as $1 billion from their healthcare Flexible Spending Accounts during 2022 because they didn’t use that money before the end of the year. But before you panic and head out on a medical buying spree, check your plan details: some FSA plans set the spending deadline on March 15 of the next year. In some rare cases, plans give their participants all of the next year.
Read on for more details, and consider matching with a vetted financial advisor for free to guide you through your healthcare spending.
What to Do If You Have Money Left in Your FSA
You’ll want to check is whether your employer’s plan allows for an account rollover. If they don’t offer the option to extend the spending deadline to March 15, employers can allow account holders to roll over as much as $570 to their 2023 account, but it’s an option – not a requirement.
And whatever your options, you’ll need to take into account that if you rolled over money under the COVID-19 exceptions in place for 2020 and 2021, that money is all subject to the spending deadline.
The FSA is a workplace benefit account that allows workers to set aside pre-tax money to be spent on healthcare expenses tax-free if they’re on the list of IRS-qualified expenditures. The 2022 FSA contribution limit is $2,850, while the 2023 limit rises to $3,050.
Previously, FSAs were structured as “use-it-or-lose-it” accounts – any unspent money at the end of the year was forfeited by the account holder. The IRS changed that to a rule that allows plan sponsors to offer two options: extending the spending deadline to March 15 of the following year or allowing 20% of the maximum annual FSA contribution to be rolled over into the new year’s account.
During 2020 and 2021 it got even better: FSA participants were allowed to roll over any amount up to the contribution limit into their 2022 balance, as part of COVID-19 relief measures. This year, the limit reverts to 20% of the annual cap, which works out to $570. For 2023 the allowable rollover increases to $610. Rollover amounts don’t count toward the new year’s contribution limit.
But there’s one catch: The choice is optional for each individual employer-sponsored plan. Employers can offer the deadline extension, the rollover, or nothing, leaving the spending deadline at Dec. 31, 2022. That sends account holders scrambling to spend their unused money on glasses, dental work and a hoard of medical supplies – up to a limit. IRS rules don’t allow account holders to stockpile more items than they can use in a single tax year. The decision and enforcement is up to your FSA plan’s administrator, who can disallow expenditures that don’t qualify.
Using up leftover FSA money is easier since Congress added to the list of allowable purchases in 2020. You don’t need a prescription to spend FSA money on over-the-counter drugs, for example, as are menstrual care products. You can find a complete list of eligible expenses at FSAstore.com, which includes expenses for Alcoholics Anonymous meetings, medicated shampoo (but not toothpaste) and breathalyzers.
As for where forfeited FSA money goes, it’s used to cover the administrative costs of the program and to reimburse employers for expenses paid before an employee’s plan was fully funded. This happens because you can spend your entire yearly FSA contribution as soon as the year starts but quit the next week, sticking your boss with the balance.
The deadline to contribute to your Flexible Spending Account may not be the end of the calendar year. Some FSA plans set the spending deadline on March 15 of the next year. In some rare cases, plans give their participants all of the next year. Your employer may also allow you to roll over as much as $570 (20% of the $2,850 2022 contribution limit) to the next year.
Tips for Saving on Healthcare Expenses
- It can be difficult to know whether you’re putting too much, or too little, into your FSA. A financial advisor can guide you through major financial decisions, like deciding how much to set aside. Finding a vetted financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- One of the key benefits of the FSA is it allows you to reduce your taxable income. See how much you’ll pay in income tax to see if you should use an FSA to pay less in federal income tax. Get started with SmartAsset’s income tax calculator.