Good Question: Where Does Unused Flex Spending Go?
As the calendar turns over to a new year, the rush is on to get in the paperwork to spend all the money in our flex spending accounts. However, what happens if there is money leftover?
Flex spending accounts are set up by employers. Typically, between $1,000 and $3,000 is taken out of an employee's paycheck pre-tax. That money can then be spent on qualifying medical expenses or childcare expenses.
More than 39 million of us have some money in a flex spending account, according to benefits industry estimates. Plenty of those people fail to spend all the money they had withheld. So, what happens to it?
"A lot of people think it comes to us," said Jeanene Conzemius, Client Support Manager at Meritain Health in Minneapolis. She said her office processes around 30,000 flex benefit claims every month.
"It actually goes back to the employer. The employer pays for us to administer the plan for them, most of the time the gains go back so they can pay us," said Conzemius.
Flex health and childcare accounts are set up under section 125 of the IRS tax code, under a provision called "cafeteria plans." It allows employers to set up pre-tax withdrawals for health spending, adoption expenses, and commuter expenses for example.
"Because it's a tax free account, the IRS puts rules on it," said Conzemius. "You can take this money out, but it actually technically turns into employer funds when they deduct it pre-tax out of your check."
While the company gets any money leftover in the account, it is also on the hook if an employee pulls out $2,000 from the account in the early part of the year, and then quits before actually having $2,000 held back from paychecks.
When the company gets the money, there are rules on how the money can be spent.
"No, they can't throw a party," said Conzemius.
The company will usually use leftovers to pay the benefit administrator, or pay expenses related to the benefit plan. They could redistribute the leftovers equally to all the employees enrolled in the flex spending program. But under the tax code, a company cannot just give you "your" money back.
"We found people leave about $32 in their flex account at the end of the year," said Conzemius. That's not much money on an individual basis, but if 39 million people each leave $32: that's $1.2 billion; lots of leftovers.
The benefit, however, is typically worth the risk. If an average taxpayer deposits $1000 in a pre-tax flex spending account, that would be a savings of around $300 come tax time. "Look at the money you saved in taxes -- you don't pay federal taxes, you don't pay state taxes on that. Even if you lost $30, you saved far more in taxes," she explained.
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