Turning FSA Forfeitures Into a Client Conversation That Wins Renewals

Somewhere in your client's plan data is a number nobody presents at renewal: how much FSA money their employees forfeited last year. It's the single easiest conversation-starter in your book — because it's a benefit failure with the client's own numbers attached, and it has concrete fixes. Here's how to run that conversation.

Forfeitures Aren't Free Money — They're a Broken Benefit

Some employers quietly treat forfeitures as a wash, or even a plus: unused FSA funds revert to the plan sponsor. Push back on that framing, gently. A forfeiture means an employee took a pay cut on purpose — elected pre-tax dollars for expected medical expenses — and then lost the money. Every forfeited dollar is:

• An employee who got burned and will elect less next year, or nothing. Under-election is the real cost: it shrinks pre-tax payroll, which shrinks the employer's 7.65% FICA savings on every dollar not elected.
• A story that spreads. One person losing $600 at year-end does more damage to FSA participation than any open enrollment email can repair.
• A signal that employees can't find eligible spend — not that they didn't have any. Most people spend far more than their election on health and wellness; they just don't know what counts.

The employers with the "healthiest looking" forfeiture income are usually the ones with the sickest FSA participation trend. That's the reframe that gets a client's attention.

How to Pull and Present the Number

The forfeiture figure lives with the FSA administrator — request the prior plan year's forfeiture report (total forfeited, number of participants forfeiting, average forfeiture). If the administrator makes that hard to get, that itself is worth noting to the client.

Present it three ways on one slide:

Framing	What it shows
Total dollars forfeited	The headline — real employee money lost last year
% of participants who forfeited	How widespread the failure is, not just how deep
Average election vs the $3,400 limit	The fear effect — under-election is forfeiture's shadow cost

Then pair it with the plan design facts: for 2026, an employer can offer a carryover of up to $680 or a grace period of up to 2.5 months — one or the other, not both — and some offer neither. If your client offers neither, that's fix number one and it costs nothing.

The Fixes, in Order of Effort

1. Plan Design

Add the carryover (up to $680) or the grace period if the plan has neither. This caps the worst-case loss and directly softens the fear that drives under-election. Our use-it-or-lose-it guide covers the mechanics if you want a client-shareable explainer.

2. Education With a Deadline Cadence

Most forfeitures happen because employees discover their balance in December. Quarterly balance nudges and a concrete "here's what you can buy" list in Q4 beat a single year-end email. This is table stakes, though — education alone rarely moves the number much, and it's honest to say so.

3. Expense Discovery

The higher-leverage fix: help employees find the eligible spend they already have. Hammock's AI expense discovery scans connected cards and accounts for FSA/HSA-eligible purchases — finding $3,000 per employee on average. An employee who can see $3,000 of eligible spend doesn't forfeit a $1,500 election; they wish they'd elected more.

4. LMN-Unlocked Wellness Eligibility

The structural fix is widening what the FSA can buy. With a Letter of Medical Necessity from a licensed provider, wellness expenses — gym memberships, fitness, supplements, massage, recovery — become FSA-qualified under IRC §213(d). That converts the FSA from "glasses and copays" into an account that matches how employees actually spend on health. When eligible spend visibly exceeds the election, forfeitures stop being a design problem.

Making It a Renewal Win

Sequence the conversation: forfeiture number → what it signals → fixes → what next year looks like. You're not selling a product in that meeting; you're showing the client a problem in their own data and a path out of it. The follow-through — lower forfeitures, higher average elections, more pre-tax payroll and FICA savings — becomes your story at the next renewal, which is exactly the position a broker wants to be in. (For the employer-side version of this argument, see FSA forfeitures: employer options.)

How Hammock Helps

Hammock is a full FSA and HSA administrator — Mastercard debit card with Apple Pay, payroll integrations, compliance, and tax docs — with the wellness layer built in: LMN pre-authorization applied at swipe, individual clinical evaluation per participant, documented and audit-ready. Expense discovery surfaces eligible spend employees didn't know they had, which is the direct antidote to forfeiture.

For groups not ready to move administrators, the Wellness Coverage tier works on employees' existing FSA accounts with no migration — auto-claim export to the current provider — so you can fix the forfeiture problem this plan year and revisit administration at renewal. FSAs move at plan-year renewal; the wellness layer doesn't have to wait.

FAQ

Where do forfeited FSA funds go?

Unused funds revert to the plan sponsor, which can use them in limited ways (like offsetting administration costs). But the accounting gain is small next to the participation damage — burned employees elect less or opt out.

Can a client offer both a carryover and a grace period?

No. For 2026 it's a carryover of up to $680 or a grace period of up to 2.5 months — or neither. Which one fits depends on the population; the grace period suits big year-end spenders, the carryover suits everyone else.

Does LMN-based wellness eligibility hold up to scrutiny?

It should be done properly: an individual clinical evaluation per participant by a licensed provider under IRC §213(d) — never blanket category approvals — with documentation retained. That's how Hammock structures it. Not tax advice; specifics are worth confirming with benefits counsel.

What forfeiture rate should a client consider "normal"?

There's no magic benchmark, and the total dollars matter less than the trend. The better question is whether average elections are rising toward the $3,400 limit or falling away from it — falling elections mean the forfeiture fear is winning.

The Bottom Line

Forfeitures are the rare renewal topic where the data is the client's own, the problem is undeniable, and the fixes are concrete: plan design, education, expense discovery, and LMN-unlocked wellness eligibility. Brokers who bring that number to the meeting stop competing on spreadsheet price and start advising.

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