It’s Never Too Early to Prepare Clients for the FSA “Use It or Lose It” Rule

Quick look: In 2022, it’s estimated that American FSA account holders lost up to $1 billion due to the FSA “use it or lose it” rule—but 2023 doesn’t have to follow the same trend. Here are four things brokers can do throughout the year to help their clients’ employees make the most of their FSA funds and promote greater staff retention, satisfaction, and plan participation.

It’s never too early for your clients to prepare their staff for the annual flexible savings account (FSA) “use it or lose it” rule that causes many to leave funds on the table each year.

FSAs allow account holders to put tax-free money into an account that can be used to pay for specific out-of-pocket medical costs. These accounts have been shown to help employees save nearly 30% on healthcare costs, which is very impactful when considering that the average American family spends almost $450 more per month on the same products they purchased a year ago.

However, because FSA funds typically expire at the end of each year and don’t roll over, they are only helpful if they are used on time. And in 2022, it was estimated that nearly half of Americans with an FSA could have lost up to $1 billion due to the FSA “use it or lose it” protocol.

4 ways clients can conquer the FSA “use it or lose it” rule

Many employees rely on their companies to provide information about how to use their available benefits best. And in a similar vein, those companies look to their brokers to help them strategize how to help their workers take full advantage of benefits plans and foster stronger employee retention and satisfaction.

Here, we’ll share the latest FSA information for brokers and employers, and offer strategies clients can implement to ensure their staff is making the most of their FSA funds throughout the year.

1. Review FSA basics

The details about FSAs are vast, and it’s a good idea for brokers and their clients to give themselves an annual refresher (especially at the beginning of each year).

For 2022, the following FSA policies apply:

• FSA contributions are limited to $3,050 pre-tax per year per employer. Married people’s spouses can also contribute up to $3,050 in an FSA with their employer.
• Account holders can use their FSA funds to pay for specific medical and dental expenses for themselves, their spouse, and their dependents.
• People cannot use an FSA with a Marketplace plan (instead, a health savings account (HSA) can be used to pay for medical expenses if someone has a high-deductible Marketplace health plan).
• Typically, FSA funds must be used by December 31 each year and do not roll over. However, companies can sidestep this FSA “use it or lose it” rule by providing a grace period of up to 2.5 extra months to use the funds or by allowing employees to carry over up to $610 per year to use the following year. But it’s important to note that companies can only offer one of these options, not both.

Brokers should also reiterate to clients that certain FSA flexibilities offered during the COVID-19 pandemic have ended. These temporary policies stated that:

• Employers could allow participants to roll over unused amounts
• The permissible period for incurring claims for plan years ending in 2020 and 2021 was extended
• A special rule regarding post-termination reimbursements from health FSAs was adopted
• A special claims period and carryover rule for dependent care assistance programs when a dependent “ages out” during the COVID-19 public health emergency was enacted
• Specific mid-year election changes were allowed for health FSAs and dependent care assistance programs for plan years ending in 2021

2.  Share ideas on how to use FSA funds

When you consider that the average family spends $1,600 annually on products that could be purchased with tax-free FSA funds, the importance of encouraging clients to review the latest updates and relay this information to their staff becomes clear.

FSA account balances can be used for various health-related expenses, and the list of what’s eligible is constantly changing. For instance, FSA dollars can be spent on many health items typically paid out-of-pocket, like over-the-counter (OTC) medications, and recently, masks, hand sanitizer, and menstrual care products were added to the list. Brokers can share a complete, updated database of approved products and services with their clients to pass on to employees.

Business leaders can also share some more out-of-the-box ways to use FSA monies, like paying for orthodontic services that an employee’s dental insurance plan may not cover, mental health expenses like counseling services, and family-planning products and services like fertility treatments and monitors.

Teaming up with your professional employer organization (PEO) partner to help clients reiterate the benefits they provide to their employees is worthwhile all year long. Staff may not know or may have forgotten what’s available to them, and providing this insight can help clients increase their employee satisfaction and plan participation rates.

3. Plan proactive communications

Often, reminders about the FSA “use it or lose it” rule are primarily sent toward the end of the year. However, there is tremendous value in regularly dispersing information to staff.

Brokers can share the following benefits communication tactics with their clients or suggest businesses leverage a PEO that can plan and send these messages on their behalf.

• Beginning of the year: This is a great time for business leaders to communicate the basics, like what funds can be used for, how much can be contributed, the deadline to use funds, and any applicable grace period or carryover permissions.
• Mid-year: Clients can share a reminder that they are halfway to the “use it or lose it” deadline, with a quick recap of the information that was shared at the start of the year.
• End of the year: As the FSA “use it or lose it” deadline approaches, employers should emphasize quick ways to use remaining dollars, as well as full details about the grace period or carryover rules, if applicable. Clients can encourage plan participants to buy things they know they’ll need next year, even if they don’t need it now (i.e., cough and cold medicine) but should make sure their workers understand the IRS doesn’t allow stockpiling.

4. Leverage a PEO partner

Staying on top of the latest FSA regulations and benefit communications strategies is just one of the many responsibilities brokers and their clients face. That’s another area where a PEO can add value.

A PEO, like ExtensisHR, can equip brokers with comprehensive, competitively priced benefit plans to offer to small businesses. ExtensisHR’s benefits administration and management experts also keep brokers in the loop about changes to rules and regulations and upcoming deadlines and send proactive, informative communications to clients’ employees about their benefit plans throughout the year.

Looking for a partner to support you as you help clients stay ahead of the FSA “use it or lose it” rule (and more)? Contact the benefits professionals at ExtensisHR today.