Who Gets to Keep Your Unused FSA Money?

I’m a bit of a podcast junkie.

With four kids, I spend as much time driving my car as a cross-country trucker. To pass the time doing pick ups, drop offs, and waits in carpool lines, I listen to podcasts.

Name an interest of yours and I guarantee I have a good podcast recommendation. Seriously. Leave a comment or send me an e-mail.

One of my favorites is Mom and Dad are Fighting, Slate’s parenting podcast. Each week, the three hosts share triumphs and fails and offer advice on parenting kids from toddler to teens.

I don’t know what this says about me but the fails are always my favorite. I like them for the same reason Dear Abby is the first thing I read in the paper every morning. I may be stressed out about ABC in my life, but at least I haven’t done XYZ.

Wrong, I know, but what can I say.

This week one of the host’s fail was not reading the fine print on the terms of his dependent care flexible spending account (FSA).

As an aside, a FSA is a way for you to save on health care or childcare expenses by electing to set aside a certain amount from your paycheck each month, pre-tax, to spend on medical or childcare expenses. The downside? You lose any money you contribute but don’t spend in a given year.

Back to Dan, the host with a fail. Dan and his wife both work full-time and have two kids, 11 and 13. Responsible Dan calculated how much he and his wife would spend on childcare (including day camps, the summer time daycare equivalent for older kids) and used that number for the amount to be deducted from his paycheck.

The problem? Dan didn’t realize dependent care FSA(s) are only for expenses associated with the care of kids under 13 and therefore he couldn’t use the funds to pay for day camp for his 13 year old. Dan stands to lose the $1,000 he set aside to cover his daughter’s day camp fees.

Dan, don’t feel bad. I’m a lawyer and I am supposed to read things carefully and even I didn’t know 13 was the cut-off. What the heck does the government expect you to do with a 13 year old? Leave her home alone for 12 hours a day playing Fortnite? Leave her at the mall all day (like our parents did with us in the ’80s and ’90s)?

Dan summed up his fail with a great question. Who gets to keep your unused FSA money?

Believe it or not but the answer is your employer.

If your employer keeps the money, it can use the money towards the costs of administering its FSA program. These costs can be significant.

While you only contribute a small portion to your FSA each pay period, you have access to the entire account from day one, even if you quit your job before you fully fund your account. If you quit your job before fully funding the account, your employer has to eat the loss. But they can use forfeited FSA money to cover these losses.

Here’s an example of how this works. You decide to put $2,000 in an FSA for 2019. Let’s say on January 5, before you even get your first paycheck, you get into a car wreck and have $2,000 in medical expenses. You can use the full $2,000 in the FSA to cover your expenses.

Now let’s say on January 10, still before your first paycheck, you decide to quit your job. Guess what? Even though you did not contribute a cent to your FSA, you don’t have to pay back the $2,000 to your employer. Where can your employer recover its losses? From forfeited FSA money from other employees.

Another option employers have is the give unused FSA money back to its employees. But they can’t just give you back what you didn’t use in your account. Employers have to pool everyone’s unused FSA money and divide the total among all employees.

So what should Dan do? If I were him, I would hire a babysitter to come do the morning routine with the kids so I could sleep in for a week or two. Having someone else ask my kids a hundred times where their shoes are? Yes, that would be nice. Very nice indeed.

 

Leave a Reply