How Much of Your FSA Can You Roll Over?

Flexible Spending Accounts (FSAs) offer a valuable way to manage healthcare costs by allowing individuals to set aside pre-tax money for eligible medical, dental, and vision expenses. While these accounts provide significant tax advantages, a common concern for many participants is the “use-it-or-lose-it” rule. This rule historically meant that any funds not spent by the end of the plan year would be forfeited. However, certain provisions, such as the rollover option, offer greater flexibility and financial planning.

Understanding the FSA Rollover Provision

An FSA rollover provision allows a participant to carry over unused funds from one plan year into the next. This feature helps prevent forfeiture of unspent money, providing more time to use pre-tax contributions for eligible healthcare expenses.

The rollover provision is an optional benefit; employers are not required to offer it. Employers decide whether to include this flexibility in their FSA plans. It differs from a grace period, another employer-optional provision. Employers typically offer either a rollover or a grace period for their FSA plan, but not both.

The rollover’s primary purpose is to enhance FSA utility by reducing pressure on participants to spend all funds by a strict deadline. This flexibility can lead to more confident participation in FSA programs and allows for a smoother transition of healthcare savings from one year to the next.

Determining the Rollover Limit

The Internal Revenue Service (IRS) sets a maximum amount that can be rolled over in an FSA from one plan year to the next. This maximum limit is subject to annual adjustments based on inflation. For instance, the maximum carryover was $610 for 2023, $640 for 2024, and is $660 for 2025.

While the IRS establishes this maximum, employers have the discretion to set a lower rollover limit for their specific FSA plans. The actual amount an individual can roll over depends on the specific rules of their employer’s FSA plan.

To determine the rollover limit, consult the plan documents. Information is typically found through the employer’s human resources department, benefits administrator, or the FSA plan provider’s online portal. Only the unused portion of the FSA, up to the plan’s specified limit, can be carried over.

What Happens to Unused Funds Beyond the Rollover Limit

Any FSA funds that remain unspent at the end of the plan year and exceed the allowed rollover limit are subject to the “use-it-or-lose-it” rule. These excess funds are forfeited back to the employer.

Employers may offer a grace period option as an alternative to rollover. A grace period allows participants up to two and a half months after the plan year ends to incur new eligible expenses and use remaining funds from the previous year. For example, for a plan year ending on December 31, a grace period might extend the spending deadline until mid-March of the following year.

An employer can offer either a rollover option or a grace period for the same plan year, but not both. Understanding which option their employer provides is crucial for effective fund management.

Maximizing Your FSA Benefits

Effectively managing an FSA requires proactive planning and diligent tracking of healthcare expenditures throughout the year. Individuals should estimate their anticipated medical, dental, and vision expenses for the upcoming year before deciding on their contribution amount. This foresight helps to align contributions with actual needs, minimizing the risk of having excess funds at year-end.

Regularly reviewing eligible FSA expenses can also help ensure that all qualifying costs are covered. Participants should keep detailed records of their receipts for all eligible purchases and services. Submitting claims promptly throughout the year can also help in monitoring the remaining balance and preventing last-minute rushes to spend funds.

To fully leverage FSA benefits, understand your employer’s plan rules. This includes knowing whether a rollover or a grace period is offered, and the limits associated with these provisions. Consult plan documents or contact the plan administrator for clarity on deadlines, eligible items, and other requirements.