Where Does the Money Go from a flexible spending account?

Question

I have a medical flexible spending account through my employer.

I have a certain amount deducted out of each pay period and have access to tax free funds throughout the year to cover various medical expenses including co-pays, prescription drugs, dental work, etc...

The account is a "use it or lose it" type thing. So my question is....if you don't use it....and you end up losing it...where does the money go?

I really don't see how that can possible be legal as this is money that you have earned. Why can't you just have the excess at the end of the year rolled back into your pay and taxed at a normal rate?

Any thoughts?

Answer 1

As you suggested, it's a "use it or lose it" system. If you don't use it, the employer gets to keep it to cover the cost of administering the program. The key is to spend it all, and that is easy to do. If you are looking at having excess funds at the end of the year, look into purchasing some perscription sunglasses, or buying a 90 day supply of meds. There are bunches of legal ways to sepnd down your account. The IRS even has a publication on their website that lists hundreds of allowable medical expenses.

Congress has relaxed the rules a little, and employers can opt to allow you to spend your FSA account into the first three months of the following year, but they would have had to amend their plan document for this to happen. Check with your human resources department for more information.

Answer 2

It does seem rather stupid. That is why they now have HSAs. But if the money is forfeited the employer may keep their costs for the plan or divide it equally among participants (but not refund it all to the one who forfeited).

However, if you elected to pay in say $200 a month and you quit your job, you can take the full annual $2400 (if you spent it) even though you only paid in $1600 (through August).

As I said, seems stupid.

Answer 3

Your suggestion of being able to roll any excess back into your pay and having it taxed is very logical. Unfortunately, that's not the way Congress wrote the law.

Answer 4

Your employer gets to keep it. That's the way that the law was written.