'Use it or lose it' deadline approaches for many FSAs

Flexible spending account holders may only have a few more weeks to use their 2011 FSA funds for medical expenses.

The IRS allows employers to offer a grace period until March 15 after the end of a plan year. That grace period extends the time in which FSA users can incur eligible medical expenses that can be paid for using pre-tax money that was put into the account during the elected 12-month plan period.

Grace period expenses are paid out from the prior year's FSA balance.

The grace period is different from the "run-out period," which is the amount of time account holders can file claims incurred during the plan year. These typically are 90 days after the plan year ends.

Flexible spending accounts allow workers to arrange for pre-tax money to be taken out of their paycheck every month to use for eligible health care expenses. However, if there's money left over in the account that hasn't been debited or claimed for reimbursement by the end of the plan year, these funds are forfeited to the employer and workers don't have the option to roll them over for use in any plan years that follow.

PayFlex, an FSA administrator, advises on its website that "although you are encouraged to file your claims as the expenses are incurred, any paper claims for expenses that were incurred during the plan year, plus those incurred during the grace period, must be postmarked no later than the last day of the Run Out in order to be processed. It’s important that you don’t wait until the last minute to file your claims as you take a chance that you might submit the wrong information leaving you no time to properly re-submit. In other words, claims postmarked after the last day of the Run Out will not be processed."

According to Mercer Global, workers wasted between $150 million to $200 million of unspent FSA money in 2010. Benefits administrators have lobbied for an end to the "use it or lose it" provision, making some headway last year when Congressmen Charles Boustany, R-La., and John Larson, D-Conn., introduced the Medical Flexible Spending Account Improvement Act, which would allow consumers to withdraw and pay taxes on any remaining funds in their medical flexible spending accounts instead of forcing them to forfeit the remaining balance to their employer, as current rules require.

What happens to unused FSA money?

FSA funds don't roll over as they would in a health savings account. As the employer owns the account, any unused balances after the end of the plan year, run-out period or grace period are forfeited back to the employer.

The unused money stays in the plan and is generally used by employers to pay administrative expenses.

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