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Welcome to HR 101. Class is now in session. Today’s discussion will focus on the healthcare flexible spending account (FSA).
The history. FSAs are an employer-provided specialized pre-tax account designed to help employees pay for specific out-of-pocket medical expenses, according to healthcare.gov. They were created in response to the Revenue Act of 1978, a key piece of tax reform legislation that aimed to reduce income taxes, among other things.
Since 1983, FSAs have been subject to a use-it-or-lose-it rule, which the IRS implemented over concerns that employees were using them as a way to hide income, according to Slate. Under that rule, employees must deplete the funds by the end of the year, or forfeit them to their employer, CBS reported. This rule is often cited as the main reason employees don’t sign up for an FSA, according to SHRM.
In 2014, however, a new rule gave employers the option to allow employees to roll over up to $500 in unused FSA funds at the end of the plan year.
Fast-forward. Nearly two-thirds of US employers offered a healthcare FSA in 2023, SHRM’s Employee Benefits Survey showed. Despite this, most employees don’t fully understand how FSAs work, particularly the use-it-or-lose-it aspect: 68% of workers with FSAs still had funds in their accounts on December 31, 2021, according to data from the Employee Benefit Research Institute. The average sum left behind was $455.
HR should help employees understand how FSAs work, especially the use-it-or-lose it aspect, Lisa Myers, director of client services for WTW, told HR Brew. Educating them about how they can use their FSA funds is also critical. This money, which is usually distributed via a debit card, can pay for much more than employees might realize.
“Many over the counter products are FSA eligible,” Myers said, “[including] things people use every day, like Band-Aids, aspirin, ibuprofen, [and] allergy medicine. Employees can stock up now on some of the things they’ll need next year. My personal favorite is contact lens solution—which is very expensive.”
With less than a month until the new year, let this be your reminder to encourage employees to check their FSA balances.
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Correction 12/12/23: This article has been updated with the correct spelling of Lisa Myers’s name.