FSA Tax Savings Can Offset Forfeited Unused Funds, Experts Say
Workers who forfeit unused FSA dollars may still benefit overall if tax savings on contributions exceed the amount lost.
Flexible spending account holders who fail to use their full balances before year-end may still come out financially ahead, according to experts, because the upfront tax savings on contributions can outweigh any money left on the table.
FSAs allow workers to set aside pre-tax dollars for eligible medical or dependent-care expenses, reducing their taxable income in the process. The trade-off is a "use-it-or-lose-it" rule that causes many participants to forfeit remaining balances when the plan year closes — a prospect that discourages some workers from contributing aggressively.
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However, financial experts note that the math does not automatically favor caution. Depending on a worker's tax bracket, the savings generated by sheltering income from federal, state, and payroll taxes can be substantial enough to offset a partial forfeiture. For higher earners, the calculus tends to favor maxing out contributions even with some risk of loss.
The key for account holders is estimating expected expenses as accurately as possible and understanding their own marginal tax rates before deciding how much to contribute during open enrollment. Those who underestimate their healthcare needs risk leaving money unspent, while those who overestimate may forfeit more than they saved.
Experts advise FSA participants to track balances throughout the year and take advantage of any grace period or rollover provisions their employer offers, which can reduce the risk of forfeiture. Continue reading at US Top News and Analysis.
