Can You Cancel a Flexible Spending Account Mid-Year?

Flexible Spending Accounts (FSAs) offer a tax-advantaged way for individuals to pay for eligible healthcare or dependent care expenses. These accounts allow you to contribute pre-tax dollars from your paycheck, reducing your taxable income. While FSAs provide significant tax benefits, they operate under specific Internal Revenue Service (IRS) regulations that generally make elected contributions binding for the entire plan year. This often leads to questions about mid-year changes.

General Rule for Mid-Year Changes

Once you elect to contribute to a Flexible Spending Account for a plan year, your election is generally considered irrevocable. This rule is rooted in IRS regulations, specifically IRS Section 125, which governs cafeteria plans like FSAs. This regulation prevents individuals from manipulating pre-tax contributions based on fluctuating needs. The IRS requires strict adherence to these rules to maintain the tax-advantaged status of the funds.

Understanding Qualifying Life Events

While FSA elections are typically binding, certain exceptions, known as Qualifying Life Events (QLEs), allow for mid-year adjustments. These IRS-defined events must align with your desired FSA change. QLEs provide flexibility when significant life changes impact healthcare or dependent care needs.

Common qualifying life events include changes in your legal marital status, such as marriage, divorce, or the death of a spouse. A change in the number of your dependents, through events like birth, adoption, or the death of a dependent, also typically qualifies. Changes in employment status for you, your spouse, or a dependent that affect benefit eligibility can also trigger a QLE. For Dependent Care FSAs (DCFSAs), a significant change in child care or elder care costs or providers, or a change in a dependent’s eligibility (e.g., a child turning 13), may also permit an election change.

Initiating a Mid-Year Change

If you experience a qualifying life event, you must promptly notify your employer or plan administrator to initiate a mid-year change to your FSA. Notify your employer within 30 to 31 days of the event. Timely reporting is important, as changes apply to contributions and expenses incurred after the effective date.

You will need to provide documentation to substantiate the qualifying life event. For example, a marriage certificate would be required for a change in marital status, or a birth certificate for the addition of a dependent. For employment status changes, a notice of termination or a letter from a new employer might be necessary. Once approved, your employer will adjust your payroll contributions accordingly.

Handling Remaining Funds and Future Contributions

Flexible Spending Accounts operate under a “use-it-or-lose-it” rule, which means any funds not used by the end of the plan year are generally forfeited. This rule exists because FSAs cannot be used for deferred compensation. However, employers can offer certain exceptions to mitigate this forfeiture.

Two common exceptions are a grace period or a carryover provision, though employers typically offer only one, or neither. A grace period allows an extension, usually up to 2.5 months, into the new plan year to incur new expenses and use the previous year’s remaining funds. Alternatively, a carryover provision permits you to roll over a limited amount of unused funds into the next plan year; for 2025, this limit is $660. If employment terminates mid-year, the right to incur new expenses against your FSA generally ends on your termination date, and any unspent funds are typically forfeited, unless your plan offers COBRA continuation for the FSA.