Navigating the intricacies of Flexible Spending Accounts (FSAs) can be challenging for both employers and employees. Typically, there are three types of FSAs:

1. Traditional Medical FSA
2. Limited Purpose Medical FSA: For employees with a High Deductible Health Plan (HDHP) and an HSA, allowing them to set aside pretax funds for vision, dental, and orthodontia expenses.
3. Dependent Care FSA: For employees who pay for eligible services such as preschools, summer day camps, or after-school programs.

According to SHRM’s 2023 Employee Benefits Survey, 62% of employers offered an FSA plan to their employees. Despite the popularity of FSAs, a recent report from the Employee Benefit Research Institute (EBRI) reveals a concerning trend: a significant increase in FSA forfeitures, with over 50% of Medical FSA participants leaving unused funds in their accounts by the end of 2022.

This blog delves into the factors contributing to these forfeitures, examining the implications for both parties and highlighting practical strategies to help participants better manage their accounts. By understanding and addressing these issues, employers can enhance their benefits offerings and help ensure that employees fully utilize their FSAs.

Factors Contributing to Forfeitures

The rise in FSA forfeitures has been notable, with various factors contributing to the change.

Impact of Expired Pandemic-Era Provisions

During the pandemic, the Consolidated Appropriations Act of 2021 allowed for more flexible carryover amounts. For FSA plan years ending in 2020 and 2021, the IRS allowed full carryover of any unused Medical FSA or Dependent Care FSA balances. However, this rule expired for FSA plan years ending in 2022, and the IRS returned to limiting the Medical FSA carryover to 20% of the maximum election.

Following this provision’s expiration, “roughly half of FSA accountholders forfeited funds to their employer.” This change was a stark increase from previous years under the COVID provisions.

Younger People Contribute Less & Take Less

EBRI also found a strong correlation between accountholder age and both contributions and distributions. The report stated that younger account holders generally contributed less and were less likely to take distributions. When they did take distributions, the amounts were smaller compared to older account holders.

Employer Strategies to Help Reduce Forfeitures

Forfeited funds add up! According to the EBRI report, forfeitures in 2022 averaged $441 per account, totaling $1.4 billion. This is an increase from 2019, where the average was $339 per account, totaling $1.08 billion. These forfeited funds are returned to the employer unless the FSA plan includes the optional roll over provision, which allows Medical FSA participants to carry over up to 20% of IRS maximum election. Per IRS rules, funds returned to the employer can be used to offset benefit plan administrative expenses or returned uniformly to all participants as taxable wages. The forfeited amounts cannot be returned to individual participants, as this violates the IRS “use it or lose it rule.”

Employees who lose funds in their FSAs become unhappy with the plan, avoid signing up in subsequent years, and share their dissatisfaction with co-workers. This leads to reduced participation in the future.

As an employer, there are certain practical strategies you can employ to help participants manage their accounts and reduce forfeitures:

• Educate your participants. Many people find it hard to understand their benefits. Printed materials help, but understanding improves greatly when employees have the opportunity to ask questions. To start, include FSA education as part of the open enrollment and new hire education process. Find an FSA TPA partner who will provide custom materials for you and actively participate in your live and virtual meetings.
• Prioritize user-friendly features when choosing a TPA. All TPAs provide secure participant sites and phone apps to submit claims and check balances. This usually works well, but not always. Look for a TPA who makes it easy for participants to connect with a live human, avoiding the frustration of phone trees and long hold times. A good TPA also offers online live chat and interactive voice response (IVR) for balance checks.
• Keep your employees up-to-date throughout the year. Make sure that employees are set up to receive balance reminder messages so they don’t miss key deadlines.
• Ensure employees know where to find FSA-eligible products. Most TPAs partner with retailers who sell FSA-eligible products. Share these resources with your employees so they don’t run into issues as spending deadlines approach.
• Include the IRS-allowed carryover provision in your FSA plan. Sentinel advises all clients to adopt the carryover provision for the medical FSA because it's a best practice and the most participant-friendly option.

Conclusion

The rise in FSA forfeitures underscores the importance of clear communication and flexible plan options for employees. By offering personalized support and incorporating carryover provisions, employers can help ensure more effective utilization of FSAs.

Bryan Gordon, Health & Welfare Sales Consultant, Sentinel Group
https://www.sentinelgroup.com/team-members/bryangordon