IRS FSA Rollover: What Are the Current Rules?

A Flexible Spending Account, or FSA, is an employer-sponsored benefit that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses, reducing your taxable income. The primary challenge for FSA participants is the “use-it-or-lose-it” rule. This regulation requires that all funds in the account be spent by the end of the plan year, or the remaining balance is forfeited to the employer.

Understanding the FSA Carryover Option

To provide flexibility, the IRS allows employers to offer a carryover provision for Health FSAs, permitting participants to move a portion of their unused funds to the next plan year. For a plan year ending in 2024, you can carry over up to $640 into your 2025 plan year. For the 2025 plan year, the maximum carryover that can be moved into 2026 will increase to $660.

The carryover amount does not impact your ability to contribute the full, allowable amount in the following year. For example, if you carry over $640 from 2024 to 2025, you can still elect to contribute up to the 2025 maximum of $3,300. This carryover is not automatic, as it is an optional feature that your employer must adopt in its plan documents. The carryover option applies to Health FSAs and Limited Expense Health Care FSAs (LEX HCFSAs), but Dependent Care FSAs are not eligible for this provision.

The Grace Period Alternative

As an alternative to the carryover, an employer can offer a grace period. This provision gives employees an extended window of up to two months and 15 days after the plan year ends to incur new eligible expenses using the prior year’s funds. For instance, if your plan year ends on December 31, a grace period would allow you to use 2024 funds for a medical service received on or before March 15, 2025.

The distinction is that a grace period extends the time to spend your entire remaining balance on new services, whereas a carryover moves a limited amount into the next year’s account. Any funds left over at the end of the grace period are forfeited. An employer’s FSA plan can offer either the carryover option or the grace period, but it cannot offer both.

Employer Adoption and Plan Rules

To determine which provision your employer offers, you must consult your plan documents. The most direct source of this information is the Summary Plan Description (SPD), which you can obtain from your human resources department or an online benefits portal. Reviewing this document will clarify if your plan has a carryover, a grace period, or adheres to the strict use-it-or-lose-it rule.

A consideration is the impact on your eligibility to contribute to a Health Savings Account (HSA). If you have a general-purpose Health FSA with either a carryover or a grace period, you are generally rendered ineligible to make contributions to an HSA for the entire plan year. Some employers may offer an HSA-compatible Limited Expense FSA, which only covers dental and vision costs, to circumvent this issue.

Should your employment end, your access to FSA funds typically ceases. However, you may have the option to continue your Health FSA coverage through COBRA. Electing COBRA continuation would require you to pay the full premium plus an administrative fee, but it would allow you to spend down your remaining FSA balance on eligible expenses incurred after your termination date.