What Happens If You Don’t Use FSA Money?

A Flexible Spending Account (FSA) allows individuals to set aside pre-tax money from their paycheck to pay for qualified medical or dependent care expenses. This reduces taxable income, leading to potential tax savings throughout the year. FSAs help manage out-of-pocket healthcare costs, offering a tax-advantaged way to pay for various eligible services and products. The Internal Revenue Service (IRS) governs these accounts, establishing rules for their use.

Standard Forfeiture Rule

The default rule for Flexible Spending Accounts is “use it or lose it.” This IRS-mandated provision states that any funds remaining in an FSA at the end of the plan year are generally forfeited by the employee. These unused funds revert to the employer, meaning the employee loses access to the money they contributed. This rule applies unless the employer’s plan incorporates specific exceptions.

This rule prevents FSAs from functioning as long-term savings vehicles, ensuring they are used for current-year expenses. Participants must carefully estimate their anticipated eligible expenses when electing their annual contribution amount. If actual expenses are less than the amount contributed, the unspent balance is subject to forfeiture. This necessitates proactive planning to avoid losing valuable pre-tax funds.

Grace Period Option

Some employers offer a grace period as an exception to the standard “use it or lose it” rule. This provision allows employees an extended timeframe, typically up to two and a half months, after the plan year ends to incur new eligible expenses and utilize their remaining FSA funds. For example, if a plan year concludes on December 31, a grace period could extend the spending deadline to March 15 of the following year. This extension provides additional flexibility.

The grace period is an optional feature for employers, not a universal requirement. If offered, it allows participants to incur new expenses during this extended period, drawing from the previous year’s balance. Any funds not spent by the end of the grace period will then be forfeited. This option can be beneficial for those with fluctuating medical needs or unforeseen expenses early in the new year.

Carryover Option

Another optional feature is the carryover provision, which allows a limited amount of unused FSA funds to roll over into the next plan year. This amount is adjusted annually by the IRS and does not count against the maximum contribution limit for the new plan year. The carryover offers a measure of protection against forfeiture for a portion of the unspent balance.

Employers typically choose to offer either a grace period or a carryover, but not both, or they may offer neither. The decision rests entirely with the employer, as these are exceptions to the general “use it or lose it” rule.

Utilizing Remaining Funds

To avoid forfeiting FSA funds, individuals can proactively utilize their remaining balance before the plan year ends or any applicable grace period expires. This involves identifying qualified medical or dependent care expenses that can be paid with the FSA. Common eligible medical expenses include prescription medications, dental work, vision care such as eyeglasses or contact lenses, and certain over-the-counter medications and medical devices. For dependent care FSAs, eligible expenses generally cover care for a qualifying child under 13 or a disabled spouse or dependent.

Reviewing upcoming appointments or planned purchases can help exhaust the balance. For instance, scheduling a dental cleaning, an eye exam, or refilling prescriptions are practical steps. Purchasing eligible items like first-aid supplies, blood pressure monitors, or even breast pumps can also help to draw down the account. Focusing on expenses that are already anticipated or necessary helps ensure the funds are used effectively for their intended purpose.

Understanding Your Plan’s Specifics

The specific rules governing Flexible Spending Accounts, including whether a grace period or carryover option is available, are determined by each individual employer’s plan. These details can vary significantly from one employer to another. It is important for participants to understand the unique provisions of their own FSA.

To ascertain the precise rules applicable to your account, consult your plan documents or summary plan description. Your employer’s human resources department is another primary resource for information regarding your FSA’s specific deadlines and features. Additionally, the website or mobile application of your FSA administrator often provides access to your account balance, transaction history, and plan details.