Addressing the Spike in FSA Forfeitures

Navigating the intricacies of Flexible Spending Accounts (FSAs) can be challenging for both employers and employees. Recent data from the Employee Benefit Research Institute 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 all involved 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.

Strategies to Help Reduce Forfeitures

Forfeited funds add up! According to the 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.

As an employer, there are certain practical strategies you can use 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 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. You can find Sentinel’s FSA/HSA store here. 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 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. For more information, contact us.