Believe it or not, the 2021 tax season is upon us, and as employees are compiling their list of smart money moves to make before the filing deadline, it’s important they understand how to also maximize their flexible spending account (FSA). An FSA is a powerful tool to help employees protect their health and well-being and keep more of their hard-earned money where it belongs: in their pocket.
That’s why, as the tax filing deadline approaches, there is another deadline employees should heed: the March 15 FSA grace period deadline.
The grace period deadline is an optional deadline that employers can offer. It gives employees more time—typically 2 ½ months after the plan year end date—to spend down FSA funds from the previous plan year. For example, if, like most plans, your FSA plan year ended on December 31, 2021, you may have until the March 15 grace period deadline to continue to spend down last year’s money.
But, What About the Much Ballyhooed Deadline Extensions?
Temporary grace period extensions that were enacted during the peak of the COVID-19 pandemic in 2020 were not only temporary but also optional. Employers are not required to offer a grace period at all, and according to a survey from Willis Towers Watson, less than 50% of employers are offering an extension for 2021 spending deadlines.
Benefits professionals know better than anyone the turmoil the pandemic has caused for employee benefits, and while temporary benefit changes were extremely valuable and much needed, the changes have left employees more confused than ever. In a survey of 3,600 shoppers to FSAstore.com in September and October 2021, 50% of consumers indicated they are not confident they understand recent FSA deadline and rollover changes, and 75% have not been notified of their deadline or don’t recall being notified.
The Bottom Line: Confusion About Deadlines, Coupled with Higher FSA Balances, Is Likely to Lead to High FSA Forfeitures
Annual FSA forfeitures have increased year over year, and we now anticipate that cumulative forfeitures could exceed approximately $1 billion in 2022. As HR professionals, you can mitigate benefits confusion and help employees make the most of their FSA every day, especially as we approach the grace period deadline and tax season. But clear communication is the key. Here are three things your employees should understand that can help them turn their FSA into a smart money move:
- Beware the March 15 grace period. According to data from FSAstore.com, 37% of account holders say they have more money left in their account this deadline season than previous years. That means they are more likely to forfeit funds if they aren’t aware of the grace period deadline. Use all of your existing communication channels to clearly communicate whether you offer an FSA grace period deadline and what that deadline is. Then, provide information about eligible FSA expenses to help employees spend down remaining funds in meaningful ways.
- Maximize FSA contributions, and reduce taxable income. Encourage employees to map out their projected health needs to ensure they are contributing the correct amount to their FSA while accounting for potential health needs throughout the year. Tools like FSA calculators can help identify expenses they might incur for themselves and their dependents, which can make it easier to budget and allocate their tax-free healthcare dollars.
- Use tax-free dollars for everyday health needs. Encourage employees to think beyond eyeglasses and exams when using FSA funds. Educate employees about using FSA dollars to manage specific health needs, from diabetes to high blood pressure or arthritis to acne. Employees can also use their FSA to support their individual lifestyles, whether they are outdoor adventurers, fitness fanatics, or in the midst of raising a young family.
As HR professionals, we are key to ensuring employees have a positive experience with the benefits we offer. By educating them on their FSA deadlines and how to use FSA funds for regularly occurring expenses, employees can save money, and that’s always a smart money move.
Rachel Rouleau is Vice President of Compliance for Health-E Commerce, parent brand to FSAstore.com, HSAstore.com, WellDeservedHealth.com, and CaringMill.com.