FSA Deadline Looming – Time to Use-It-or-Lose-It

FSA Deadline Looming

If you have a Flexible Spending Account (FSA) then you’re probably aware of the use-it-or-lose-it rule. In short, you can set aside pre-tax funds to cover out-of-pocket medical expenses, but unspent funds are lost at year’s end.

The good news is that many employers give their employees until March 15th of the following year to spend down their balance. If you have a remaining balance, hopefully your employer gives you this flexibility.

But you have to act fast! March 15th is less than two weeks away. If you don’t, you’ll risk joining the ca. 50% of FSA participants who forfeit an average of $75 each in unspent FSA funds.

If you hate this rule as much as I do, then you’ll be pleased to know that Congress has considered changing the rules. That’s the good news. The bad news is that the relevant legislation was introduced a year ago and has gone nowhere.

According to OpenCongress.org, the Medical FSA Improvement Act of 2011:

Amends the Internal Revenue Code to allow amounts in a flexible spending arrangement (FSA) that are not spent for medical care to be distributed to the FSA participant as taxable income after the close of a plan year (currently, such unspent amounts are forfeited). Includes such FSAs in the definition of tax-exempt cafeteria plans.

Another reasonable alternative would be to let people carry the funds over to the next year while reducing their contribution limit by an equal amount. This could admittedly get complex with open enrollment happening before the end of the year but it wouldn’t be impossible to implement.

Alternatively, the IRS could simply let people deduct expenses up to the FSA limit, and do away with FSAs entirely. Is it just me, or does it seem like FSAs add an unnecessary layer of complexity and expense?

Regardless of what happens in the future, consider yourself warned. In just under two weeks, any money left in your medical FSA will evaporate into thin air.

11 Responses to “FSA Deadline Looming – Time to Use-It-or-Lose-It”

  1. Anonymous

    Be aware on the FSA, that if you are downsized, you lose your FSA. Guess where the leftover money goes, back to the employer that downsized you. It happened to my wife. It is the last time we use an FSA!

  2. Anonymous

    Yes, FSA and HSA are both unnecessarily complex. Why would you expect any less from our tax system (one of the most corrupt, unfair, and overly complex systems in the free world)? I’ll respond to this as I do to every conversation about the frustratingly complex tax code: FairTax.org (this fixes about 90% of everything that is wrong with our economic system).

  3. Anonymous

    All the more reason to switch to an HSA. I have had one for 2 years now, have an account balance of almost $7,000 invested in TIPS so that I pay no state(CA) tax(or federal). Paying all medical expenses out of pocket with after tax dollars and getting a tax free return of 8% on my money so far! You can not beat that!

  4. Anonymous

    Actaully, you can still reimburse for OTC medications but you’ll just need a doctor’s prescription. You can’t usually get them all at once at the beginning of the year. Believe me, the doctors hate it just as much as the patients!

  5. Anonymous

    I don’t use FSA, but couldn’t you just funnel money through it on demand? Or must you truly try to predict the next years worth of medical expenses up front?

    With HSAs, you can funnel money on demand. You have a $1000 medical bill, so write a check TO the HSA, then write another check OUT of the HSA to pay the medical provider, and harvest all the tax savings come April 15. Its just an accounting trick.

    Granted you don’t need to funnel money “on demand” with an HSA, since you never lose your contributions (like the FSA).

  6. Anonymous

    I love using my FSA. However, rules vary widely. The FSA at my husband’s job ends on 6/30. The new one starts on 7/1. Check with your employer to verify.

  7. Anonymous

    I agree completely that FSAs add a completely unnecessary level of complexity. Medical expenses should either be deductible or not, and none of this expense guessing game.
    This is the type of law that fails to benefit those who need it the most- the non-nerds with relatively large medical expenses.

  8. Anonymous

    @cultofmoney, tell your friend that those items are not deductible moving forward in 2012. OTC items are now excluded from the list of items covered in an FSA according to Obamacare. A stealth tax that many will not realize.

  9. Anonymous

    A friend of mine stocked his emergency kit with left over cash from his FSA last year. he bought a bunch of bandages, over the counter medications, ointments, all type of things. He said that he probably never would have updated it without the requirement to spend it or it going to waste.

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