FSA Use-It-or-Lose-It Rules Explained: What Happens to Unspent Money

A flexible spending account, or FSA, is an employer-sponsored benefit that lets workers set aside part of their paycheck, before taxes, to pay for eligible health or dependent-care expenses. The appeal is straightforward: money that goes into an FSA is not subject to federal income tax or payroll (FICA) taxes, which can meaningfully lower a household's tax bill. The catch, and the source of endless confusion each December, is that FSAs are not like a savings account you can let sit indefinitely. Under longstanding Internal Revenue Service rules governing Section 125 cafeteria plans, unspent FSA money is generally forfeited if it is not used within the plan year, a policy commonly called "use-it-or-lose-it."

How FSAs Work

When you enroll in a health FSA during open enrollment, you elect an annual contribution amount, which your employer deducts from your paychecks in equal installments. The full amount you elected is typically available to spend on eligible expenses starting on day one of the plan year, even if you haven't contributed that much yet through payroll deductions. Eligible expenses include copays, deductibles, prescription drugs, many over-the-counter medications, and a wide range of medical, dental, and vision costs, as detailed in IRS Publication 969. Dependent-care FSAs work similarly but cover costs like daycare, preschool, and after-school care for qualifying dependents, and funds there generally become available only as they are contributed.

The Use-It-or-Lose-It Rule

Because FSA contributions are excluded from taxable income, the IRS restricts how long that money can be held before it must be spent or forfeited back to the plan. Left unmodified, the rule is strict: money not used for eligible expenses incurred by the last day of the plan year is lost. Employers cannot simply refund unused balances in cash, since that would undermine the tax-advantaged structure of the account.

Two Ways Employers Soften the Deadline

To reduce the sting of forfeiture, the IRS permits employers to add one of two optional features to a health FSA, though a plan cannot offer both at once.

• Grace period: Employers may allow up to an additional 2.5 months after the plan year ends during which employees can still incur and submit eligible expenses using the prior year's remaining balance.
• Carryover: Alternatively, employers may allow employees to roll over a limited dollar amount of unused health FSA funds into the following plan year, on top of that year's new contribution election. The IRS adjusts this carryover cap periodically; for 2025 balances carrying into 2026, the limit was $660, alongside a $3,300 annual health FSA contribution limit, per IRS guidance.

Employers are not required to offer either option, so some plans still enforce a hard year-end cutoff. Dependent-care FSAs are treated differently: they are generally eligible for a grace period but not for carryover, which is one reason financial planners often warn dependent-care FSA users to estimate their annual childcare costs conservatively.

What Happens If You Don't Spend It

If a plan year ends, any applicable grace period lapses, and any carryover cap is exceeded, the remaining balance is forfeited. Forfeited funds do not go to the individual employee; under IRS rules they must be used by the employer for purposes such as reducing overall plan administrative costs or benefiting the FSA plan as a whole, not returned to specific participants.

FSA vs. HSA, in Brief

Unlike a Health Savings Account (HSA), which is portable, can be invested, and never expires, an FSA is tied to a specific employer's plan year and is subject to forfeiture risk. HSAs are only available to people enrolled in a qualifying high-deductible health plan, while FSAs have broader eligibility. Because the two accounts have different rules on rollover, portability, and eligibility, workers choosing between them, or deciding how much to elect, should read their plan's summary plan description carefully each open enrollment season and consult the IRS's official guidance for the current year's limits.