Don’t Make This Costly FSA Mistake

If you have a Flexible Spending Account (FSA) through work, now is the time to make sure you will spend all of the money you set aside before the end of the year.

Don’t shrug at me, given there’s still many months left in 2024.

As anyone with an FSA should be aware, the money you set aside in an FSA can typically only be used for that given year. If you don’t use it, you likely will forfeit that money. According to an analysis by the Employee Benefit Research Institute about half of people who had set aside money in an FSA in 2022 didn’t use all the money in their account, and the average amount of money they forfeited was nearly $450.

That’s a lot of people squandering part of their benefit, and I think we can agree that more than $400 is a lot of money to fritter away.

As if that’s not frustrating enough, it’s younger workers who tend to forfeit more. Given how hard it can be these days to build financial security, I sure hate seeing younger adults fail to squeeze every dollar of value out of a benefit, especially one that they contribute to.

For those of you with access to an FSA through work, I think they can be such a smart financial move. But only if you take full advantage.

Let’s do a quick review of how to make the most of an FSA.

Money you contribute to an FSA reduces your tax bill. The dollars that are taken out of your paycheck and put into your FSA are not taxed. So, for example, if you contribute $1,000 a year to your FSA, your taxable income for the year will be $1,000 lower. That’s a valuable savings.

You can use those tax-free dollars to reimburse yourself for qualified expenses. Again, being able to use pre-tax dollars to cover expenses is a nice win.

There are two types of FSAs:

• A Medical FSA enables you to pay for qualified health care costs with your pre-tax dollars.
• A Dependent Care FSA enables you to pay for daycare expenses of children younger than 13, or older dependents (parents or siblings you care for).

Most FSAs are “Use it, or Lose It”: Okay, now let’s talk about the big catch. Any money you set aside in your FSA but don’t use will ultimately be lost. That said, check with your employer on its forfeiture rules. Some employers allow users to roll over some unused funds into the next calendar year, and some employer FSA plans have a grace period that allows participants to use up the account in the first few months of the following calendar year. Employers can offer either option, but not both.

There is absolutely no reason anyone with a Medical FSA should forfeit money. First, check that you understand the forfeiture rules for your plan. Do you have until December 31, 2024, or until say March 15, 2025? Then plan accordingly.

There is a tremendously long laundry list of what is deemed a qualified healthcare expense. Everything from your insurance copays and deductibles, to OTC medications, prescription eyeglasses and contacts, dental work and prescriptions. Chiropractic and acupuncture treatment, which often is not covered—or not fully covered—by health insurance, is eligible to be reimbursed through your FSA account. Your plan will have a complete list of qualified expenses you can check out.

If you found you set aside too much in a Dependent Care FSA for 2024, check whether you can still use the funds into early 2025. Then make sure you reduce your 2025 contribution to try and avoid this problem next year. Alternatively, you could consider prepaying some of next year’s costs in this calendar year, so you can use up all your FSA funds. The only caution with this move is to not accelerate so much of your care payments into this year that you aren’t able to fully claim the federal child and dependent care tax credit next year that can reduce taxable income by up to $3,000 for one eligible child/dependent or $6,000 for two or more children under 13, or adult dependents.