A significant portion of employees with health flexible spending accounts (FSAs) are forfeiting their unused funds at the end of the plan year, with recent research indicating that approximately 40% of holders lost an average of $404 in 2024. This trend, highlighted by new research from the Employee Benefit Research Institute (EBRI), underscores a common challenge with these tax-advantaged accounts, which are designed for eligible health expenses but often operate on a ‘use it or lose it’ principle.

Despite the potential for forfeiture, individuals may still find themselves financially ahead by participating in an FSA. The key lies in the tax savings realized from setting aside pretax dollars for healthcare. Even if a portion of the contributed amount is ultimately lost, the overall tax benefit gained from the FSA contributions can outweigh the forfeited sum. This calculation depends on an individual’s total tax rate, including federal, state, local, and payroll taxes. For instance, a worker in a 35% tax bracket contributing $3,400 could see an estimated $1,190 in tax savings, meaning that forfeiting less than this amount still results in a net financial gain compared to paying for expenses with after-tax dollars.

While some employers offer grace periods or allow a limited amount to be rolled over to the next year (up to $680 for 2026), a substantial number of FSA holders face strict deadlines. Understanding these plan-specific deadlines, which can vary and are not always December 31st, is crucial. Employees are advised to consult their employer or FSA administrator for precise dates and to review their account balances regularly. The EBRI study, which analyzed over 3.3 million accounts totaling $3.9 billion in contributions, also noted a slight decrease in the average forfeiture amount from $436 in 2023 to $404 in 2024.

For those with remaining balances as the deadline approaches, numerous options exist to spend down the funds on eligible healthcare products and services. Beyond typical medical, dental, and vision appointments, FSA funds can cover a wide array of items, including over-the-counter medications, menstrual care products, sunscreen, first-aid supplies, and certain health-monitoring devices. Many plans provide online portals for checking balances, submitting claims, and confirming eligible expenses, offering a practical way to utilize remaining funds and avoid unnecessary losses.

Key Takeaways

• Approximately 40% of health FSA holders forfeited unused funds in 2024, averaging $404 per forfeiture.
• Even with forfeitures, employees can still benefit financially from FSAs if their tax savings exceed the lost amount.
• Employees should verify plan-specific deadlines and explore numerous eligible expenses to spend down remaining FSA balances before forfeiture.

Editor’s Analysis & Impact

The recurring issue of FSA forfeitures highlights a persistent challenge in employee benefits management. While FSAs offer significant tax advantages, their ‘use it or lose it’ nature creates a predictable leakage of funds, impacting both employees and potentially employers. The EBRI research provides concrete data on the scale of this issue, suggesting that many employees struggle with accurately predicting their healthcare needs for the year. This situation presents an opportunity for employers to enhance employee education on FSA utilization and for financial wellness programs to integrate better guidance on managing these accounts. The long-term outlook may involve increased demand for more flexible benefits options, such as HSAs, or potential adjustments to FSA rollover policies to mitigate these annual losses and maximize the intended benefits for participants.

Frequently Asked Questions

Q: What is a Health Flexible Spending Account (FSA)?
A: A Health Flexible Spending Account (FSA) is a tax-advantaged account that allows employees to set aside pretax money from their paycheck to pay for eligible out-of-pocket healthcare expenses. These funds can be used for a wide range of services and products, from doctor visits and prescription drugs to over-the-counter medications and medical supplies.

Q: What does 'use it or lose it' mean for FSAs?
A: The 'use it or lose it' rule means that any funds remaining in a health FSA at the end of the plan year are typically forfeited back to the employer. Some plans may offer a grace period of up to 2.5 months or allow a limited amount (up to $680 for 2026) to be rolled over to the next year, but employers generally cannot offer both options.

Q: How can I avoid forfeiting my FSA money?
A: To avoid forfeiting your FSA money, it's essential to track your spending and anticipate your healthcare needs for the year. Check your plan's specific deadlines for incurring expenses and submitting claims. You can use remaining funds on eligible items like over-the-counter medications, first-aid supplies, menstrual care products, or schedule upcoming medical appointments and services before the deadline.