FSA Loophole: How to Avoid Forfeiting Your Funds

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows you to set aside pre-tax money for qualified medical expenses. Contributions are not subject to federal income, Social Security, or Medicare taxes, which provides a direct tax advantage for costs like deductibles and copayments.

The main challenge of an FSA is the “use-it-or-lose-it” rule. This Internal Revenue Service (IRS) regulation dictates that all funds must be spent by the end of the plan year. If you have a balance remaining after the deadline, those funds are forfeited back to your employer.

The Grace Period Provision

An employer may offer a grace period as an exception to the “use-it-or-lose-it” rule. This provision gives employees an extended window of up to two months and 15 days immediately following the end of the plan year to spend remaining FSA funds from the previous year.

For example, if your company’s FSA plan year ends on December 31, a grace period would allow you to pay for qualified medical costs until March 15 of the following year using the prior year’s balance. This extension applies to incurring new expenses, not for submitting claims for expenses that occurred during the past plan year.

The grace period creates an overlap where you can spend down an old balance while also contributing to and using your new year’s FSA. Any funds remaining from the previous year at the end of the grace period are then forfeited. Employers are not required to offer this provision.

The Carryover Provision

An alternative to the grace period that an employer might offer is the carryover provision. This feature allows you to move a limited amount of unused FSA funds from one plan year to the next. For 2025 plans, you can carry over up to $660 of unused funds.

These carried-over funds do not count against the new year’s contribution limit. For instance, an employee could roll over $660 and still elect to contribute the full maximum amount for 2025, which is set at $3,300. This gives the employee a higher available balance for the new year.

A plan can offer the carryover provision or the grace period, but it cannot offer both. If your plan includes the carryover feature, any amount left in your account above the specified IRS limit at the end of the year is forfeited.

Identifying Your Plan’s Specific Rules

Understanding whether your FSA plan includes a grace period, a carryover, or neither is necessary for managing your funds effectively. This information depends entirely on the specific plan your employer has established. The first place to look for these details is in your Summary Plan Description (SPD).

The SPD will explicitly state the rules for the end of the plan year, including whether a grace period or carryover is permitted. If you cannot locate your SPD, this information is available through your online benefits portal. Logging into the account you use to manage your benefits should provide access to plan documents.

If you are still unable to find the information, the most direct approach is to contact your company’s human resources department or the third-party benefits administrator. Knowing your plan’s specific rules well before the year-end deadline is the first step in forming a strategy to avoid forfeiture.

Strategic Year-End Spending

If your plan has no provision for leftover funds, or if you have a balance that exceeds the carryover limit, strategic spending becomes your primary tool. This requires proactive planning to use your funds on legitimate, necessary expenses. A good approach is to review your potential medical needs for the remainder of the year and schedule appointments or make purchases accordingly.

Consider expenses beyond simple copays and prescriptions. You can use FSA funds to book a year-end dental cleaning or an eye exam. If you receive a new prescription from that eye exam, you can purchase prescription eyeglasses or sunglasses. Many over-the-counter items are also eligible, allowing you to stock up on supplies like first-aid kits and contact lens solution.

This planning helps ensure you are buying items you genuinely need rather than making wasteful purchases just to zero out your account. Thinking ahead about upcoming health needs allows you to spend your remaining balance on qualified medical expenses.