End of Year FSA/HSA Balance Reminders

As 2024 comes to a close, now is a great time to remind employees to use the remaining balances within any pre-funded accounts such as HSAs or FSAs that may not roll over into the following year. Luckily, there is a wide variety of services and products that are eligible for employees to use their funds on. Let's take a look at the differences between HSAs and FSAs and what kinds of things are eligible for each account type.

Flexible Spending Account

A health flexible spending account (FSA) is an employer-sponsored account that employees can use to pay for or reimburse their qualifying medical expenses on a tax-free basis, up to the amount contributed for the plan year. Health FSAs are subject to a “use-or-lose” rule that generally requires any unused funds at the end of the plan year (plus any applicable grace period) to be forfeited.

According to the recent article from the Employee Benefits Research Institute, in 2019, 44% of workers with FSAs forfeited at least some of their money. On average, the workers lost $339. In 2020, 48% of workers forfeited some money, with the average forfeit being $408. Money.com did the arithmetic using an estimate of the number of FSAs in existence and concluded workers in aggregate forfeited $3 billion in 2019 and $4.2 billion in 2020.

As an exception to the use-or-lose rule, employers may allow participants to carry over up to $500 (as adjusted for inflation) of unused funds into the next year. The carry-over amount may be used to pay or reimburse medical expenses incurred during the entire plan year to which it is carried over. Also, the carry-over amount does not count toward the Affordable Care Act’s (ACA) limit on employees’ salary reduction contributions to a health FSA.

Beginning in 2020, the maximum carry-over amount receives an annual adjustment so that it equals 20% of the ACA’s limit on salary reduction contributions to a health FSA for that plan year. For plan years beginning in 2024, the carry-over limit is $640. For plan years beginning in 2025, the carry-over limit is $660.

Health Savings Accounts

Many employers offer high deductible health plans (HDHPs) to control premium costs and then pair this coverage with health savings accounts (HSAs) to help employees with their health care expenses. An HSA is a tax-favored trust or account that can be contributed to by, or on behalf of, an eligible individual for the purpose of paying qualified medical expenses. For example, individuals can use their HSAs to pay for expenses covered under their HDHPs until their deductibles have been met, or they can use their HSAs to pay for qualified medical expenses not covered by their HDHPs, such as dental or vision expenses.

HSAs provide a triple tax advantage—contributions, earnings and amounts distributed for qualified medical expenses are all exempt from federal income tax, Social Security/Medicare tax and most state income taxes. Due to an HSA’s potential tax savings, federal tax law includes strict rules for HSA contribution. A survey of HSA savers at a large Midwest organization (n = 732) found that about 1-in-4 employees (29.1%) were unsure or did not know their HSA contributions were not federally taxed.

The average employee contributions rose to $1,962, while the average employer contribution decreased slightly to $762; however, the growth in individual contributions outweighed the decrease in employer contributions

Promoting Smart Healthcare Consumerism Year Round

How is your organization ensuring your employees are educated on how to best use their benefits accounts year round? By educating and encouraging employees to do their due diligence and shop around for the best healthcare pricing, they can become more involved and empowered about the choices they're making that impact their overall health journey. While health care decisions shouldn’t be made solely based on price, cost comparison is critical to ensure employees use their FSA and HSA funds most efficiently.

For more information on how you can help your organization's employees make the most out of their benefits before the year ends, reach out to your AssuredPartners team.