Flexible Spending Account Loopholes

Now that it’s well past midway of 2005, it’s a good time to check up on your healthcare Flexible Spending Accounts (FSAs), if you use them. If you do use them, you are probably aware that most FSAs make you forfeit any of the unused balance at the end of the year. We usually don’t have too many health-related expenses, so we only put in $500 this year. My wife ended up getting some dental work done, so it looks like we won’t have to worry about losing any of it. Nickel of FiveCentNickel writes how he hates the annoying “use-it-or-lose-it” aspect of these accounts in a recent post. This also reminded me, did you know that there is a flipside to this?

I got this example from talking with my HR person earlier this year. Say this December you decide to put in $3,000 in your Flexible Spending Account for the next year. If you are paid bi-weekly this ends up being $115 per paycheck. Say on January 2nd you get $3,000 laser eye surgery, and file a claim form. You’ll get your $3,000 back immediately (well, in a week or so), even though you’ve barely paid $115 into your FSA. Then, you quit! Do you have to pay back the balance of your $3,000 surgery? No! Of course, quitting your job just to get $3,000 of free healthcare can be stupid, but according to her it happens, and the company just has to counterbalance it with funds from unused FSA money.

Anyways, this in no way justifies the fact that if I expected to use $3,000 and was lucky enough only to need to spend $1,000, I lose $2,000 in pre-tax money. If anything, this shows how the system is flawed either way! I just thought it was interesting.


  1. Not really a comment on this particular topic per say, but just wanted to say I dig your site, it’s interesting reading. Keep up the good work!

  2. Thanks, Chubby! It’s always good to hear kind words of encouragement.

  3. My wife and I both happen to wear glasses. In past years when we had excess money in the account in December, we splurged and got prescription sunglasses. Not something to do every year, but since my insurance doesn’t cover eye care, it’s a nice way to use it.

  4. Anonymous says:

    Our FSA is set up diferently, in that claims are banked, and paid out as the money goes into the account. In your example, we’d get whatever had gone into the account in January, and there would be an outstanding balance on our statement. Each month, we’d get another check. So, at least for some, the “free” $2K plan wouldn’t work!

  5. Anonymous says:

    To anonymous–you may want to call your HR department on this; according to the IRS website, your employer can’t do this.

    “You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed.” (http://www.irs.gov/publications/p969/ar02.html#d0e1732)

    On a side note, don’t always assume everything your employer does is on the up-and-up, even if there is no reason to suspect they are cheating you. For example, I recently found out that my company is violating California law (where I live and work) because they wait too long to issue the paychecks–although because they are based in Massachusetts, they had no clue about the California requirements.

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