Explainer: What Happens to Unused FSA Funds

Use it or lose it! If you have money taken out of your paycheck before taxes for medical expenses, you know you have to use that money by the deadline or kiss it goodbye. 

So, what happens to all of that "lost" money?  It turns out the employer gets it. But they can only use it for certain things related to the Flexible Spending Account plan.

"The money stays in the plan," said Avery Neumark of accounting firm Rosen Seymour Shapss Martin & Company. "They can use it to pay the outside third-party administrator who administers the plan. The money can also be used to offset expenses of the plan for employees that terminated early in the year."

When an employee allocates some of each paycheck to an FSA, they immediately have access to the full amount they plan to put in for the full year.  Sometimes, an employee may spend their whole year's worth of Flex money before the end of the year and then leave the company before making all their contributions.  When that happens, the company gets stuck with the bill, but it can use any of the so-called "lost" money from other Flex participants to make up the difference. 

About one out of five employees at large companies participates in a Flex plan, according to health and benefits consulting firm Mercer Global.  Mercer's annual survey pegs the amount of money "lost" each year by participants at 4 percent or $60 per person.  Add that up across the country, and it's quite a hefty sum — for 2010 it was between $150 million and $200 million dollars.

For some Flexible Spending plans, the deadline to spend the money was December 3; for others, it's coming up on March 15. 

Why the discrepancy?

Years ago, the IRS implemented the extra two-and-a-half month grace period after participants complained about an end-of-year crunch to get medical appointments to use their flex money.  But it's up to each company to amend their plan to take advantage of it.

"Some plans didn't do it for administrative purposes," Neumark said, "because this can lead to an administrative headache, where in the first 2-and-a-half months some employees are using their old accounts and some are using their new accounts.  From an administrative standpoint, employers wanted to make it uniform. "

If your plan's deadline is March 15, it's not too late to use up the money in your 2011 Flex account.  You may want to do it now, to avoid an early March crunch!