Wednesday, May 27, 2009


Earlier this month I received the below question from Murray, submitted as a comment to my post ASK THE TAX PRO - UNUSED FLEXIBLE SPENDING ACCOUNT CONTRIBUTIONS.

It is as good a question as any with which to begin the return of ASK THE TAX PRO Wednesday.

Q. Where does the money go? To the employer? To the government? Or does it just evaporate?

A. The question relates to the unused portion of moneys set aside in an employer-sponsored “Flexible Spending Account” or FSA.

An FSA is a “use it or lose it account”. The employee-participant “forfeits” any unused monies set aside. If he/she sets aside $5,000 for the year, but only submits $4,000 in qualifying expenses, the unused $1,000 is lost. The employee is $1,000 “out of pocket” – although, as I point out in my post, this is not a tax-deductible loss.

A plan year is generally a calendar year. Originally expenses had to be submitted by December 31st to be included. However under new rules for Flexible Spending Accounts you have 2½ months of the following year to submit expenses against FSA monies contributed for the year – if your plan so permits. So participants would be able to submit expenses up until March 15th of 2009 to be applied to monies set aside in calendar/plan year 2008.

So, as you ask, where does any unused FSA money go?

Obviously the money does not just evaporate. And it does not go to the government. Ultimately the money goes back to the employer.

I do not know the specific mechanics of what happens to forfeited FSA monies, as I have never had, or wanted, any direct experience with the administration of an FSA. I would expect that initially the unused money remains in the actual “plan” – and can be used to offset plan losses that can arise from employees whose employment is terminated with a “negative” FSA cash balance.

It is my understanding that FSA contributions are generally made evenly throughout the year via payroll deduction - but expenses can be “reimbursed” as they are submitted, up to the total amount that has been set aside. So it is possible that an employee who has set aside $5,000 can submit $4,000 in dental expenses incurred in February, although only $833 in actual employee payments have been made. If the employee leaves the company at the end of June, with only $2,500 in total payments, he/she does not have to repay $1,500. {Please correct me if I am wrong}.

However, the bottom line answer to the question is that, as said above, ultimately the unused FSA contributions go back to the employer.


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