With FSA Grace Period Deadline Approaching, Here’s How to Communicate with Workers

Employers that offer a flexible spending account (FSA) grace period have a few more weeks to help employees make the most of their remaining tax-advantaged funds.

Although FSAs have a use-it-or-lose-it clause, meaning any account balances left at the end of the year are usually forfeited, some employers offer a grace period that allows employees extra time in the new year to use the prior year’s FSA funds. An estimated 36% of employers offer an FSA grace period, according to the Employee Benefit Research Institute.

The IRS allows employers to permit a grace period of up to two and a half months. For most FSAs — those with a Dec. 31 deadline — the grace period ends March 15. But that may differ depending on employers’ plan year.

HR teams at companies that offer the grace period would be wise to use the next several weeks to remind employees of the approaching FSA deadline and nudge them to use any remaining funds, experts said.

“This is crucial because when employees forfeit FSA funds, not only does that cause financial hardship and impact their ability to manage their health care, but it can result in lower employee engagement and dissatisfaction with your benefits offerings,” said Keri Kaiser, chief revenue officer for Health-E Commerce, a wellness company in Dallas that owns the FSA Store and HSA Store. “And in a time when employers continue to face hiring and retention challenges, benefits should and can be a positive workforce tool rather than detracting from your company’s efforts.”

Low understanding of FSA deadlines and eligibility rules causes consumers to forfeit significant bucks — collectively some $3 billion, according to figures from Money — in unused FSA funds each year, Kaiser said.

“Health care and financial benefits can be complicated for employees, especially if they don’t use them frequently and if they aren’t receiving regular education and support,” she said. “Year after year, the most common questions we receive from consumers are related to finding their account balance and understanding how they can use their funds. Not surprisingly, these are also the two most common reasons we hear for why people forfeit funds each year.”

FSAs also are often confused with health savings accounts, which do not have the same use-it-or-lose-it rule.

Communication Best Practices

When it comes to communicating with employees about FSAs — including specifically the upcoming March deadline — think simple and straightforward, said Jeff Thoms, managing director of Inspira Financial, an Oak Brook, Ill.-based financial services firm. “Use quick emails, posts on your internal site, or even a team huddle to share what employees need to know. Do not just focus on the deadline — provide examples of how to use the funds, like booking an eye exam or stocking up on eligible health supplies. This turns the conversation from ‘use it or lose it’ into something helpful and actionable.”

FSAs can be used on plenty of things, including preventive exams, doctor visits, surgical procedures, and dental and vision care, along with many items that employees rely on every day, like over-the-counter medications and pain relief products, bandages, thermometers, menstrual care products, and baby health products.

Because the list can be vast, one easy thing to do is direct employees to a searchable eligibility list of items that can be purchased with an FSA, Kaiser said.

Additionally, HR and benefits leaders can “drive home relevant spending ideas to your workforce, such as information about newly eligible telehealth services or information about children’s health if you have a large population of parents in your workforce,” she said. “Because FSA eligibility is so broad, it’s easy to customize spending tips to your team’s needs.”

Kaiser said these practices shouldn’t only occur around the FSA deadlines in December and March, but should take place year-round.

“HR teams can improve FSA literacy through simple education and communication — not only at deadline time, but throughout the year,” she said. “By clearly communicating what your company’s deadline is, if you offer an extension or rollover option, and by illustrating how employees can use FSA funds to improve and manage their health, HR teams can help them make the most of the benefits you offer and help them avoid losing money.”