FSA accounts, nice racket

[Guest IluvNewComp]

So, if I put $1,000 of my own in my FSA account and only need $800 this year, the remaining $200 gets forfeited.

That's some racket, huh?

Who gets the forfeited money? My company? The general account where all the money is held?

[disclaimer: I knew full well going into this what happens with the account; the use-it-or-lose-it system. And, I'll probably use my entire account, but I'll have to do some creative purchases.]

[Guest John14]

Looks to me like you are ahead regardless of if you spend down the remaining $200. Why don't you use post tax dollars next time and complain about that.

The unseen liability to the company is an EE could spend the entire election and terminate employment before the total election is deducted from payroll. The forfeiture amount is not transformed into general treasury money.

The company provided you with a voluntary benefit. If you are older than 18, be responsible for your choices.

[ETA Consulting LLC]

Looks to me like you are ahead regardless of if you spend down the remaining $200. Why don't you use post tax dollars next time and complain about that.

The unseen liability to the company is an EE could spend the entire election and terminate employment before the total election is deducted from payroll. The forfeiture amount is not transformed into general treasury money.

The company provided you with a voluntary benefit. If you are older than 18, be responsible for your choices.

Benefitslink really needs a "like" button.

Keep in mind that some FSA accounts allow you to spend everything prior to actually funding. Once you select your amount for the year, you can spend that entire amount on January 1st. This becomes very useful when you know you'll be leaving your employer early in the new year. You can maximize your election and have the procedure (i.e. lasik or braces) in early January for the full amount. When you leave the company, you're no longer there to make the payroll payments. This is a free-ride; that is paid by the other particpants' forfeitures into the plan. I imagine that some plans, however, require you to actually fund prior to reimbursement.

Good Luck!

[Chaz]

It has to be pointed out that, although the employer undertakes the risk of terminations with overspent accounts, in the long run the employers usually come out ahead because forfeitures usually are more than overspent accounts.

Note that employers usually use net forfeitures to pay the administrative expenses of the plan, not having big parties.

[QDROphile]

The health FSA is insurance. It is odd insurance because the premium is equal to the benefit limit. You don't complain under your regular insurance benefit if you are lucky enough not to have claims for the year that exceed your premium for the year. Also, if you maxed out on claims early in the year and then terminated employement, the insurance company (the employer) would have a loss that would not be covered by the remaining premiums for the year because those premiums would not be collected. Insurance is all about risk. The FSA is not a bank account.

[jpod]

Ironically, even in the scenario you proposed you are likely ahead of the game even if you forfeit $200. Assume you are in the 15% Federal income tax bracket. Salary reduction of $1,000 saves you $226.50, when you add in the combined FICA/Medicare tax rate of $7.65%. So, you lost $200 but you gained $226.50, so you are ahead a net of $26.50.

[Lou S.]

It's been a long while since we were in teh FSA business but IIRC the FICA tax savings alone generally more than paid for overspent ee accounts and administrative expenses. The unused balances were typically rare in the smallish plans we did administer and back then someone used to just buy a bunch of over the counter meds, glasses or contact lense solution if they weren't going use it all. I think someone once got creative and bough a bunch of condoms and ran it though as birth control to zero out the account. Though I realize some of that can no longer be run through the FSA.

I have little sympathy for people who over estimate and then complain about the small forfieture even though as other have pointed out they are are propably already ahead when figuring in tax savings.

Though I wish they would bring back the old ZEBRA accounts, now that was a tax benfit plan. Though with the current debt/deficeit those aren't likely to ever make a comeback in congress.

[bcspace]

That's some racket, huh?

Who gets the forfeited money? My company? The general account where all the money is held?

A company can also now adopt the Grace Period to further minimize an ee's risk. But during enrollment, making a conservative well-planned election should be stressed. Consider also the tax savings. At $800 tax free vs. $200 left in the election, it's likely the ee has at least broke even.

The employer is also not without risk. An employee could elect $1000, claim it all and be fully reimbursed in the first month, and then terminate and the company may not collect the remaining contributions. Employer risk is minimized via eligibility requirements and max elections that make sense. The employer is also saving on payroll taxes which typically cancels this type of risk.

In well-run and well-communicated plans, the risk for either ee or er is virtually zero. With an average of 10,000 employees per year over multiple client companies over more than 20 years, we estimate only one person lost money and we personally traveled to visit with him near the end of of the plan year to urge him to spend it. He had elected money for dental work, was in constant pain because the work was not done, yet he feared going to the dentist so much that he would rather lose a couple of grand. Not much one can do about a person like that.

We have our companies save any unused employee funds to use as employer contributions. Because the unused amounts are very small (usually a few dollars or cents for the few ee's who don't reach their election; most go over), it takes many years and a large employer before enough funds accumulate to do a reasonable one-time employer contribution for one plan year.

The bottom line is that FSA's are no racket, but one of the best employee benefits an employer can offer. Insurance pays out MUCH less than a dollar for every dollar put into it, AD&D is even worse. FSA's pay out perhaps $1.20 or more for every dollar put into them. No offense to insurance as it serves an important purpose, but insurance is over promoted and far more expensive as it dips down into covering less than catastrophic issues.