The holiday season is busy enough, and for millions of flexible spending account users each December, the most festive time of year is also a scramble to spend down account funds before the all-important Dec. 31 deadline. Unfortunately, FSAs have long been bogged down by a crisis of communication that makes deadline season all the more difficult for employers and employees alike. In fact, a 2014 Aflac study found that 22% of employees are “not very” or “not at all knowledgeable” about their FSAs.
Luckily, key messaging and proactive steps on the part of employers and benefits professionals in advance of the deadline can help employees maximize their tax benefits and cover the medical products and services they need to stay healthy year-round. Our own internal company surveys show that nearly 90% of FSA users prefer some sort of deadline communication. However, the percentage of employees who actually receive one is small.
Here’s what your employees need to understand about their FSA and how to spend their dollars to help them make the most of their accounts before the clock runs out.
Staying ahead of deadlines
Every FSA has a concrete plan-year end date, but depending on how these accounts are administered, additional sources of relief may be available for FSA users to spend down their funds. This is a crucial piece of information that all employees should be aware of. It’s so important, in fact, it should not only be communicated to employees in advance of the deadline, but during new employee onboarding and yearly open enrollment.
There are two options employers can choose (or decline to offer) that are extremely helpful in boosting FSA enrollment, retention and ease of use by account holders: the two-and-a-half-month grace period, and the $500 rollover or carryover.
In 2005, the IRS created the FSA grace period, which gives FSA users up to two-and-a-half months after the end of the plan year to spend down FSA dollars. For those with a Dec. 31 deadline, the grace period deadline is March 15 of the coming year. This certainly lessens the impact of the traditional Dec. 31 deadline by giving FSA users additional time to spend their funds on medical products and services.
However, employees with a grace period extension still have to spend down their FSA funds by the end of the grace period or risk forfeiting that money back to their employer.
The $500 carryover was introduced in 2013 by the IRS and allows FSA users to carryover up to $500 of their plan year allocation into the next year (this amount doesn’t count against the employee’s yearly contribution limit). If this is in place, the end-of-year deadline is mostly irrelevant participants, as they can continue to move the remainder of their funds into next year's allocation for as long as the account is open.
Finally, if a “run-out” period is available to employees, this is another vital piece of information they should be aware of. The "run-out" period follows the end of the FSA plan year and gives account holders additional time to submit claims incurred during the prior year. Typically, most FSA “run-out” periods last 90 days, but these time periods are determined by the employer, not the IRS, so they could feasibly last for any amount of time. This is especially helpful for employees and can help alleviate stress around the FSA deadline.
Explore FSA-eligible product options to spend down funds
When account holders understand their deadlines (if any), they can be better prepared for when their plan year ends, and the spend down is easier and less stressful. One of the keys to maximizing FSA funds is understanding what’s eligible, and sharing a comprehensive eligibility list is a great start. While most people are aware that over-the-counter medications, Band-Aids and other pharmacy staples are FSA-eligible, there are thousands of items that fall under the IRS’s standards for product eligibility.
Here are just a few surprisingly eligible items.
Pain relief. In addition to over-the-counter medications requiring a prescription, non-prescription OTC pain relief products like TENS machines, braces and kinesiology tape are FSA-eligible to help people recover from injuries. This is especially helpful for fitness enthusiasts — or employees who participate in the office basketball or volleyball league — who are looking for new ways to bounce back quickly from muscle pain or strains.
Baby care. New babies come with a lot of extra supplies. An FSA can cover a wide range of baby care products — from pregnancy to birth and infancy. FSA users can save on essentials like prenatal vitamins, breastfeeding supplies, nasal aspirators and more by buying with tax-free funds.
Sunscreen. As long as a sun care product offers broad spectrum protection against UVA/UVB rays and an SPF of 15 or more, it is FSA-eligible. This applies to products like sunscreen and sun protection lip balm, as well as products intended for infants, children and adults.
Diagnostic products. Devices that provide a window into a person's state of health are great options for those who have extra money to spend around deadline time. Products including blood pressure monitors, glucose monitors, thermometers and more are covered by flex dollars.
Deadline season doesn't have to be a mad rush when you provide the right tools and communication for your employees. Getting ahead of the confusion during deadline season will help your employees better manage their accounts, pay less in taxes, and prevent their hard-earned money from going to waste.
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