Can You Use FSA Funds for Prior Year Expenses?

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows individuals to set aside pre-tax money from their paycheck to pay for eligible healthcare expenses. This reduces taxable income and helps manage out-of-pocket medical, dental, and vision costs. Funds become available at the start of the plan year or as contributions are made.

FSA Plan Year and Spending Deadlines

Each Flexible Spending Account operates within a defined “plan year,” typically a 12-month period. While many plans align with the calendar year, from January 1st to December 31st, an employer’s specific plan may follow a different fiscal year.

A fundamental rule governing FSAs is the “use-it-or-lose-it” provision, established by the Internal Revenue Service (IRS). This rule stipulates that any funds not used by the end of the plan year are forfeited back to the employer.

Employers offer options like a grace period or carryover provision to provide additional time to use funds, mitigating the risk of forfeiture. The specific rules regarding the plan year end and the availability of these exceptions are determined by each employer’s particular FSA plan.

Understanding Grace Periods and Run-Out Periods

Employers may offer specific provisions to allow for extended use or claim submission, addressing the “use-it-or-lose-it” rule. A grace period is one such option, providing participants with an additional window to incur new eligible expenses and use funds remaining from the previous plan year’s balance. This grace period can extend up to 2.5 months after the end of the original plan year.

For example, if a plan year ends on December 31st, a grace period could allow expenses to be incurred until March 15th of the following year, using the prior year’s funds. This effectively extends the time to spend the money that was allocated for the previous year.

Another mechanism is the run-out period, which serves a different purpose. A run-out period is a timeframe during which participants can submit claims for eligible expenses that were incurred during the previous plan year or grace period. This period typically begins after the plan year or grace period ends, and it commonly lasts for about 90 days. Unlike a grace period, a run-out period does not allow for new expenses to be incurred; its sole purpose is to provide additional time for processing and submitting documentation for expenses already incurred.

The key distinction between these two provisions lies in when the expenses can be incurred. A grace period allows for new expenses to be incurred after the plan year ends, drawing from the prior year’s funds. A run-out period, conversely, is strictly for submitting claims for expenses that have already happened within the original plan year or any applicable grace period. Employers have the discretion to offer either a grace period or a carryover option, but generally not both, for their FSA plans.

A carryover provision is another flexibility an employer might offer, allowing a specified amount of unused FSA funds to roll over into the next plan year. For instance, for a plan year ending in 2025, up to $660 might be carried over if the employer’s plan permits it. It is important for individuals to consult their specific FSA plan documents or human resources department. This will confirm which, if any, of these provisions apply to their account and understand the exact deadlines for incurring expenses or submitting claims.

Submitting Claims for Eligible Expenses

Once an eligible expense is incurred, the process of submitting a claim is necessary to receive reimbursement from your FSA. Accurate and complete documentation is required to substantiate each expense. This documentation must include the date the service was received or the item was purchased, a clear description of the service or item, the dollar amount charged, and the name of the provider or merchant.

Acceptable forms of documentation often include itemized receipts, an Explanation of Benefits (EOB) from an insurance carrier, or detailed pharmacy printouts for prescriptions. Credit card receipts, canceled checks, or balance forward statements are generally not sufficient as they often lack the necessary detailed information. For expenses paid with an FSA debit card, additional documentation may still be requested if the purchase is not automatically verified as eligible by the system.

Claims can be submitted through various methods provided by your FSA administrator. Common options include an online portal, a mobile application, or by mailing or faxing a completed claim form along with the supporting documentation. Many online systems allow for direct upload of scanned documents or photos of receipts. It is advisable to keep copies of all submitted claims and supporting documentation for personal records.

Adhering to the specific deadlines for claim submission is important. Even if an expense was incurred during the eligible plan year or grace period, reimbursement will only occur if the claim is submitted within the designated run-out period. Failure to submit claims by this deadline can result in forfeiture of the funds allocated for those expenses. After submission, reimbursement is usually processed within a certain timeframe, often through direct deposit to a linked bank account or by check.