Flexible Savings Account Forfeitures Slightly on the Rise

After analyzing more than 3.2 million flexible spending accounts in 2022, the Employee Benefits Research Institute found that average contributions have increased, but roughly half of accountholders are forfeiting funds to their employers.

Unlike people with health savings accounts, FSA accountholders risk forfeiting funds if they do not spend their FSA by the end of the plan year.

EBRI found that the likelihood accountholders will forfeit some FSA funds to their employer has slightly increased since 2019, as forfeitures in 2022 averaged $441 or $1.4 billion on average for all the accounts reviewed. That is up from $339, or $1.08 billion, in 2019.

With FSAs, contributions are made on a pre-tax basis and distributions are tax-free, as well, as long as distributions are spent on qualified medical expenses. Some FSAs have a grace period, which allows accountholders an extra 90 days after the end of the plan year to spend funds from their FSAs, with the remaining amount forfeited.

Other FSAs include a rollover feature, which allows accountholders to roll over a statutorily limited amount from one plan year to the next ($640 in 2024).

In 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act, enabling employers to opt into a provision that allowed employees to carry over FSA funds in excess of the statutory maximum. This provision was extended through 2021, but it has now expired.

“2022 was the first year that we went back to the pre-pandemic regime of rolling over a maximum of [$570],” says Jake Spiegel, research associate of health and wealth at EBRI. “But … as with many workplace benefits, people aren’t always completely engaged. And some people might have just been on autopilot, assuming they can roll over as much as they had in 2020 or 2021.”

Spiegel says because almost half of accountholders forfeited at least some portion of their contributions in 2022, employers can “build a case” for additional decision support regarding FSAs when employees are going through automatic enrollment.

“[This could be] something as simple as the employer firing off an email every quarter saying, ‘Hey, you have X dollars left in your account and the deadline [to spend] is March 15,’” Spiegel says.

He added that employers could also provide workers with some sort of worksheet to help them estimate how much they spent on health care expenses the year before and use that as a baseline for setting contribution elections for the coming year.

“It doesn’t have to be particularly complex or sophisticated, but I think some additional little nudges like that could … help people avoid forfeitures,” Spiegel says. “Because when we hear [the word] forfeiture, it has a negative connotation. Nobody feels good about forfeiting money to their employer.”

However, Spiegel explains that even if someone ends up forfeiting FSA funds to their employer that doesn’t necessarily mean they did not benefit from participating in the FSA. When someone contributes money to an FSA, they save money on federal, state and local payroll taxes, which can add up pretty quickly depending on a participant’s income bracket, allowing them to save a decent amount of money, Spiegel says.

If a plan sponsor notices that a lot of FSA funds are being forfeited, Spiegel says they could also consider offering a different type of FSA, such as one with a grace period or one that allows rollovers, if their current offering is a “use it or lose it” type of account.

EBRI also found that accountholder age was strongly correlated with both contributions and distributions. Younger accountholders tended to contribute less and were less likely to take distributions, and when they took distributions, they took smaller distributions than their older counterparts.

The youngest workers were also more likely to have a remaining balance, with 73% forfeiting money to their employer. According to the report, this may be because younger workers are less likely to incur health care expenses than older workers.

Spiegel says it’s going to take at least another year or two to determine whether the increase in forfeitures will continue, as EBRI will not start asking for more data until the summer.

According to EBRI, the average FSA contribution in 2022 was $1,291, with the vast majority, 85% of accountholders, taking a distribution.