Do You Have to Use FSA by End of Year?

A Flexible Spending Account (FSA) is a tax-advantaged financial tool designed to help individuals manage qualified healthcare expenses. These accounts allow contributions to be made on a pre-tax basis, which can reduce an individual’s taxable income.

The Standard “Use It or Lose It” Rule

The “use it or lose it” rule, established by the Internal Revenue Service (IRS), is the foundational principle for Flexible Spending Accounts. This regulation stipulates that any funds remaining in an FSA at the close of the plan year are forfeited by the account holder. Its purpose is to encourage participants to align their annual contributions with their anticipated healthcare spending for the current year. This ensures that FSAs are primarily utilized for immediate or near-term medical needs, rather than functioning as long-term savings vehicles. Account holders must estimate their healthcare expenditures to avoid losing their contributions.

Employer Options for Unused Funds

While the “use it or lose it” rule is the IRS default, employers have the option to implement certain provisions that offer flexibility regarding unused FSA funds. Employers can choose to offer either a grace period or a carryover option, but they cannot offer both. It is also permissible for an employer to offer neither option, adhering strictly to the default forfeiture rule.

A grace period extends the time to incur eligible expenses for the prior plan year’s funds, often by up to two and a half months after the official plan year-end. For instance, if a plan year ends on December 31, a grace period might allow expenses incurred until March 15 of the following year to be paid with the previous year’s FSA balance.

Alternatively, an employer may allow a limited amount of unused FSA funds to be carried over into the next plan year. For plan years beginning in 2025, the maximum carryover amount is $660. This means up to $660 can be rolled into the new plan year, providing a buffer against forfeiture. Employees should consult their specific FSA plan documents or human resources department to determine which, if any, of these options their employer has adopted.

Eligible Expenses for Your FSA

Flexible Spending Account funds can be used for a broad range of qualified medical expenses, helping individuals manage their healthcare costs with pre-tax dollars. Common eligible expenses include medical co-payments, deductibles, and prescription medications. Vision care, such as eye exams, eyeglasses, and contact lenses, also qualifies for FSA reimbursement.

Dental care expenses, including routine cleanings, fillings, and more extensive procedures, are typically covered as well. Following legislative changes, certain over-the-counter (OTC) medications and health products, such as pain relievers, cold medicines, and bandages, are now eligible without requiring a doctor’s prescription. It is important that expenses are primarily for medical care and have not been reimbursed by other insurance plans.

Maintaining meticulous records and keeping all receipts for FSA purchases is essential for substantiation purposes. For a comprehensive and definitive list of eligible expenses, individuals should refer to IRS Publication 502 or contact their FSA plan administrator. Specific plan rules can sometimes vary, making direct verification a prudent step.