Does FSA Dependent Care Rollover to the Next Year?

Many employees rely on a Dependent Care Flexible Spending Account (FSA) to set aside pre-tax dollars for childcare or elder care expenses. A common concern is whether unused funds roll over or are forfeited. Understanding these rules helps avoid losing money at the end of the plan year.

Rules regarding fund rollover depend on employer policies and IRS regulations. Some plans offer limited extensions, while others follow a strict “use-it-or-lose-it” policy. Knowing the available options and deadlines ensures employees maximize their benefits.

Dependent Care FSA vs. Healthcare FSA

A Dependent Care FSA and a Healthcare FSA both allow employees to set aside pre-tax income for specific expenses but serve different purposes. A Dependent Care FSA covers childcare or adult dependent care costs, such as daycare, preschool, summer camps, and in-home care for an aging parent. A Healthcare FSA covers medical expenses, including copays, prescriptions, dental work, and vision care.

The contribution limits also differ. In 2024, the IRS set the maximum contribution for a Dependent Care FSA at $5,000 per household or $2,500 for married individuals filing separately. A Healthcare FSA has a higher individual contribution limit of $3,200. These limits impact tax savings, as contributions reduce taxable income.

Another key difference is how funds are accessed. A Healthcare FSA provides the full annual election amount at the start of the plan year, allowing employees to use the entire balance before fully contributing. A Dependent Care FSA only reimburses expenses up to the amount already contributed, which affects budgeting for care costs.

Grace Period or Carryover Options

Dependent Care FSAs generally follow a “use-it-or-lose-it” rule, meaning any remaining balance at the end of the plan year is forfeited. Some employers offer a grace period of up to 2.5 months into the following year, allowing participants to use leftover funds. For example, if a plan year ends on December 31, the grace period could extend until March 15.

Unlike Healthcare FSAs, which may allow a limited carryover of unused funds, Dependent Care FSAs do not offer this option. If an employer does not provide a grace period, any unspent contributions are lost once the plan year ends. Employees must carefully estimate their dependent care expenses to avoid overcontributing.

Employer-Specific Amendments

Employers have flexibility in structuring Dependent Care FSA offerings within IRS guidelines. While federal regulations set contribution limits and eligible expenses, companies determine specific plan rules, such as reimbursement procedures and claim submission deadlines. Some employers allow mid-year election changes if an employee experiences a qualifying life event, such as a change in marital status, the birth of a child, or a shift in employment that affects dependent care needs.

The timing of reimbursements also varies. Some companies process claims as expenses are incurred, while others require periodic or lump-sum submissions. Understanding an employer’s reimbursement schedule is important, as delays in processing could impact cash flow. Additionally, some employers use third-party administrators, which may impose additional documentation requirements or processing fees.

Tax Consequences of Unused Funds

Funds contributed to a Dependent Care FSA are exempt from federal income tax, Social Security tax, and Medicare tax, reducing taxable income. However, forfeited funds eliminate these tax benefits. Unlike other tax-advantaged accounts, there is no option to reclaim unused contributions or roll them into future tax years.

Forfeited funds do not trigger additional tax liabilities, but they mean the employee effectively paid out-of-pocket for dependent care expenses without receiving the intended tax savings. For example, if an individual contributed the full $5,000 limit but only used $4,000, the remaining $1,000 is forfeited. Since this amount was never taxed, it does not generate a refund or deduction. In contrast, if the same $5,000 had been claimed under the Child and Dependent Care Tax Credit, the taxpayer might have received a direct tax reduction of up to 35% of eligible expenses, depending on income.

Deadlines for Filing Claims

Employees must adhere to strict deadlines when submitting claims for reimbursement. While the grace period allows additional time to incur expenses, the deadline for filing claims is separate and determined by the employer. This “run-out period” typically extends a few months beyond the plan year’s end, giving participants time to submit receipts. If claims are not filed within this window, any remaining balance is forfeited.

The length of the run-out period varies but often falls between 60 and 90 days after the plan year ends. For example, if a plan year concludes on December 31, the deadline to submit claims may be March 31. Employees should verify this date with their benefits administrator to avoid missing reimbursements. Some employers require specific documentation, such as itemized receipts or provider tax identification numbers, to process claims. Ensuring all paperwork is in order before the deadline can prevent delays or denials, maximizing the use of available funds.