A lot of employers allow you to put part of your pre-tax paycheck into a flexible spending account which can be used for health and medical related expenses. One disadvantage is that any unused funds in the account are lost at the end of the year. Where do those unused funds go? Why couldn’t the employer return those funds to you as part of your salary?
They ultimately go back to your employer.
I imagine a lot of it goes to offset when the company is left on the hook for departing employees and I’m guessing many companies have a third party administrator who has to be paid as well.
If you decide you want say, a $500 FSA for the next year, you (probably) know that you have access to the full $500 starting on January 1st.
So let’s say on January 1st you go to the optometrist and incur a bunch of out-of-pocket expenses that you use your FSA debit card to pay for, then you go to Walgreens afterward and buy some OTC medications and things of that nature.
So basically you spend your entire $500 on day one.
Then on January 15th you get a great job offer and leave your company.
The way most FSA work is you’ll pay towards that $500 through each pay check. For ease of calculation, if you are paid in 12 monthly payments that means each month $41.66(repeating :)) is taken out of your paycheck.
But you can spend the full $500 right away…no big deal if you stay at the company all year. But if you leave before you’ve paid the $500, the company is out that money. The company fronted you the $500, and they aren’t permitted to collect it from you after you leave.
So anytime that happens, someone spends all their front-money and doesn’t stay for the whole calendar year, the company eats a loss. But, every time someone doesn’t spend their full FSA, they company gets a windfall. Hopefully for the company the windfall exceeds the loss. But an FSA is essentially designed to operate that very way.
It’s a way to spend pre-tax dollars on out of pocket medical expenses and to have your company front you that money even if you incur those expenses before you’ve paid any money into the plan for that year. The catch on this is, if you don’t spend what you said you would, you’ll have made all of the contributions and not spent all of the money. You can think of that “loss” as your “payment” for the company putting that money up for you in the first place, I suppose.
They go to the employer. I know that sounds completely unfair but it is one reason that companies offer them. I used to work on the administration side of Flexible Spending Accounts (FSA’s) for lots of large companies. There are other weird rules that benefit employees or ex-employees. Employees often have all of their FSA funds available at the 1st of the year even though they aren’t paid for until the end of the year through payroll deductions. Employees can and do get medical or dental work done, use the whole amount, and then quit leaving the employer on the hook for it. There is probably a way for the employer to get that money repaid but they rarely do and just eat the loss.
I never understood why FSA’s exist at all. Health Savings Accounts (HSA’s) are much more straightforward and the money can be rolled into the next year or even taken with you if you leave your job.
My understanding has been that part of the rules that govern FSAs are why employers can’t go after the funds after an employee leaves.
I think the reason you might use an FSA instead of an HSA is because there are limitations on who can have an HSA. My understanding is the tax regulation is such that you aren’t permitted to have an HSA unless you’re enrolled in a High Deductible Plan.
But if you’re in a regular insurance plan, you still might have say, a $500 deductible, or various copays you have to fork over even after deductible and then for things like Dental and Vision work there are often charges that aren’t fully covered. Anyone even people with regular insurance plans can enroll in an FSA so that the money they do have to spend out of pocket is spent pre-tax.
Most people don’t take advantage of FSAs and just cover their out of pocket expenses with after-tax dollars to their detriment.
In my experience, the FSA accounts are managed by a contracted company. And THAT company is the one who chortles with glee over those unspent dollars.
~VOW
HSAs aren’t a good substitute for FSAs because an HSA must be linked a high-deductible policy (minimum of $1100 deductible). There can be other differences between the policies. An FSA can be used in conjunction with any insurance plan.
An employer could choose to return unused funds, just like they could choose to give you a bonus or a raise at any time. Returning the funds would be taxable income to the employee like any other wage or bonus.
:dubious: I guess that’s possible, but I’ve never heard of forfeited funds going to the TPA (third party administrator), except as an offset to their administration fees. In other words the company still benefits (although the plan probably operates at a net loss to the company overall).
The reason companies offer them despite the cost is the same reason they offer most other non-mandated benefits: to attract and retain employees.
I was responsible for my employer’s FSA Plan about 10 years ago. I seem to recall that unused funds were split amongst the participants the next year but I could be wrong. I’m quit certain the TPA didn’t get to keep them any more that they would have been on the hook for the shortages described above.