Time is up: How to Spend Leftover FSA Funds



Time is running out for employees offered a health flexible spending account grace period to spend unused funds before that use-it-or-lose-it grace period ends on March 15, 2016.  

IRS Notice 2013-71 expanded Notice 2005-42 to allow employers to provide employees with a 21/2-month grace period at the end of a plan year OR carry over up to $500 of unused FSA funds into the following plan year. 

Voluntary pretax salary reductions for contributions to health FSAs must be elected by employees in advance of a plan year.  Rev. Proc. 2015-53 set the 2016 maximum at $2,550, unchanged from 2015.

Employees generally make an election based on anticipated qualifying health costs.  If an employee sets aside funds for a procedure such as LASIK eye surgery and doesn’t go through with the procedure during a plan year, they must either use the funds on something else or lose the funds. 

Many employees know that office visits, co-pays, prescriptions, health-related travel expenses including lodging and transportation and prescription eyeglasses are covered by health FSAs but aren’t aware that other medical and health expenses qualify. 

IRS Publication 502 provides a list of eligible medical expenses, but employees should check their plan to confirm all of the eligible FSA expenses covered by their employer. 

For example, employees may be unaware that they can use FSA dollars to cover the following expenses:

  • Acupuncture;
  • Bandages;
  • Breast pumps;
  • Chiropractic office visits;
  • Condoms and other over-the-counter contraceptives;
  • First aid kits;
  • Medical record charges;
  • Pregnancy tests;
  • Smoking cessation programs;
  • Sunscreen with SPF 15 or more; and
  • Teeth grinding prevention devices.

However, under §9003 the ACA, over-the-counter medicines are reimbursable only with a prescription or if they are insulin.

While the health FSA grace period runs out on March 15, 2016, employees have up to April 30, 2016 to submit claims that took place during that time period.

Employers may retain unused amounts, known as experience gains, to defray the expenses of administering their plans, reduce premiums for the following year or allocate forfeitures among employees contributing through salary reduction on a reasonable and uniform basis.

Design benefit plans and respond quickly and confidently to a range of potential issues with a free trial to the Benefits Practice Resource Center.