Can You Use FSA to Pay for Previous Year’s Expenses?

Flexible Spending Accounts (FSAs) are employer-sponsored plans that allow individuals to set aside pre-tax money from their earnings. This money covers qualified medical and dental costs for themselves, their spouse, and dependents. By reducing taxable income, FSAs provide a tax advantage for managing healthcare expenses.

FSA Basics and the “Use It or Lose It” Rule

FSA funds are designated for expenses incurred within a specific plan year. The “use it or lose it” rule mandates that any funds not utilized by the end of the plan year are forfeited back to the employer.

This rule exists because the IRS views unused FSA funds as deferred compensation, which is prohibited under IRS Code Section 125. The “use it or lose it” rule is a source of concern for FSA participants, but certain provisions can offer flexibility.

The Run-Out Period for Submitting Claims

While expenses must be incurred by the end of the plan year, many FSA plans offer an additional timeframe known as a “run-out period” for submitting claims. This period extends for 90 days or more after the plan year concludes. The run-out period allows participants to submit documentation for eligible expenses that were incurred in the previous plan year but not yet reimbursed.

For instance, if a plan year ends on December 31, a common run-out period would extend until March 31 of the following year. This administrative window is solely for processing claims for expenses already incurred, not for incurring new medical expenses. It provides a practical opportunity to ensure all eligible expenses from the prior year are properly submitted for reimbursement.

Grace Periods and Carryovers

To further alleviate the “use it or lose it” rule, employers may offer a grace period or a carryover option. A grace period provides an extension, up to 2.5 months, immediately following the plan year end. During this extended time, participants can use their previous year’s FSA funds to pay for newly incurred eligible expenses.

Alternatively, a carryover provision allows a limited amount of unused FSA funds to roll over into the next plan year. For plan years beginning in 2024, the IRS maximum carryover amount is $640, increasing to $660 for plan years beginning in 2025. These carried-over funds are then available for expenses incurred in the new plan year and do not count against the new year’s contribution limit. The availability and specific terms of grace periods and carryovers are determined by the employer and plan design, so participants should verify their plan’s specific details.