Can I Deduct a Forfeited FSA?

You must exercise care when you determine the amount you contribute to your flexible spending account because you forfeit any money left in the account at the end of your employer's reimbursement period. You use pre-tax dollars to fund an FSA, and the amount of your contribution reduces your taxable income. From the Internal Revenue Service’s perspective, you've already received one tax deduction, so you cannot deduct any forfeited amount on your income tax return.

FSA Description

A flexible spending account is a program offered by employers. It allows you to pay for certain out-of-pocket health care and dependent care expenses using pre-tax dollars. If you want to participate, you must enroll during your company's benefit enrollment period. When you do, you must specify how much you want to contribute for the year. You must renew your participation in each benefit year. The IRS allows you to deduct only health care expenses that exceed 7.5 percent of your adjusted gross income, but an FSA enables you to circumvent this requirement.

FSA Limits

If you have high health care or dependent care bills, an FSA provides a perfect way for you to offset those costs with pre-tax dollars. As of 2013, you can contribute up to $5,000 per household for a dependent care FSA and $2,500 for a health care FSA. The minimum annual contribution you can make is $250 per FSA type.

How It Works

Your employer deducts a portion of your annual contribution from each paycheck. For example, if you elected to contribute $2,400 and you get paid semi-monthly, your employer will deduct $100 from each paycheck. Once your FSA window opens, you can access the full amount of your election at any time, even if you have not yet fully funded the account. For example, you elect $2,400. Three months after you begin making contributions you schedule two crown replacements. Your dental insurance covers 50 percent, but you must pay the remaining $1,100 cost. You can submit the receipts immediately despite the fact that you've only actually contributed $600 to your FSA to date.

Forfeiture

It is important to remember that you can access your full election at any time. People often must forfeit their contributions because they wait until it's too late to schedule service or they fail to submit receipts on time. Your employer's FSA administrator retains any funds you forfeit for internal use in administering the program. Because your contribution consists of pre-tax dollars, your FSA contribution amounts appear on your Form W-2. Save your receipts to present to the IRS in the event of an audit.

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About the Author

Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.

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