- FSA contributions must be used up by the annual deadline. Otherwise, your employer will confiscate your money.
- Additional FSA funds can be used for pharmacy supplies or to prepay for future medical expenses.
- For those who don’t have a lot of health-related expenses, a high-yield savings account may be a better option.
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A Flexible Spending Account (FSA) is a savings account that allows you to save for health-related expenses while reducing your taxable income. Like a 401(k) or IRA, this account is funded in pre-tax dollars, which puts you in a lower tax bracket and may help reduce your taxes.
However, there is a caveat. FSA contributions must be used up by the annual deadline. Otherwise, you risk having your money confiscated. For example, if you contribute $3,050 in 2023 (this year’s contribution limit), you must plan to spend at least $3,050 on medical expenses. In 2023 he could lose the rest of his $2,050 if he only spends $1,000.
The IRS is very strict about this rule, but your employer may cut you a little break. Let’s see what happens when you don’t use FSA and what you can do to avoid this money loss.
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What happens if I deposit too much money with the FSA?
The FSA has a “use it or lose it” policy. Any donations you make will expire by the annual deadline (usually his January 1st). If you donate more than you can reasonably use within one year, The money is eventually returned to the employer. Perhaps your employer will use this extra money to pay for the costs of managing your FSA account.
That said, some employers offer a grace period to push annual deadlines to later months. For example, if the annual deadline is his January 1st, the employer may give him until mid-March to use up her FSA funds.
Other employers allow some surplus funds to be “carried forward” to the next year. It might be a relief, but don’t get carried away. The IRS sets carryover limits. For 2023, the maximum carryover amount is $610. So even if he ends 2023 with $1,500, he could have to lose $890.
But there is one last hope for unused contributions. Employers can pool them and distribute them evenly to employees who contributed during the year. This way, you get a slice of the pie either as fringe benefits or in the form of matching contributions for FSA contributions to be made in the following year.
How to avoid confiscation of FSA money
If your medical expenses fluctuate and your health-related expenses aren’t too high, a high-yield savings account might be a better option. But if you’re donating to the FSA now and you’re worried you won’t be able to use it by the deadline, this is what I would do.
- Let’s go to the pharmacy. You may not realize how much you can buy with FSA. Bandages, heating pads, massage guns, alcohol wipes, sunscreens, and feminine products are just a few of the many products available for purchase. If you really have to, go shopping before you lose your money.
- Please pay for future expenses in advance. If you have ongoing treatments or prescriptions, you may be able to pay in advance.
FSA is a great way to save on medical costs, but it’s not for everyone. Despite the tax incentives, donating too much is gambling. If you don’t have a lot of medical expenses, you might want to have a high-yield savings account. Your savings will accrue interest and you don’t have to lose your money before the annual deadline.
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