The FSA Use-It-or-Lose-It Rule and Deadlines Explained: What Happens to Your Money and How to Keep It

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Why the FSA Use-It-or-Lose-It Rule Exists in the First Place

FSAs are funded with pre-tax payroll dollars, which means the IRS has a real stake in how they work. Under Section 125 of the tax code, a benefit plan must carry a genuine "risk of forfeiture" to qualify for pre-tax treatment. Without that requirement, a health FSA would effectively become an unlimited tax-sheltered savings account — you'd elect the maximum every year, spend nothing, and roll everything forward indefinitely. The IRS won't allow that.

As IRS Publication 969 states, funds not spent by plan year-end (plus any grace period or carryover the plan offers) are forfeited. That's the rule in one sentence.

Contrast that with an HSA. Health Savings Accounts are individually owned, not employer-sponsored benefit plans under Section 125, so the risk-of-forfeiture requirement simply doesn't apply. Unused HSA balances roll forward forever and can even be invested. The difference isn't an oversight. It's a deliberate policy line between accounts designed for current spending versus long-term savings.

Dependent care FSAs sit in an even stricter corner. They face tighter limits on carryover than health FSAs, because the underlying policy goal is to help cover current childcare costs — not to accumulate a tax-free nest egg. Most employer plans don't offer carryover for dependent care FSAs at all, and IRS guidance has not encouraged it. If you have both a health FSA and a dependent care FSA, treat their deadlines as completely separate problems.

What Are the Actual FSA Deadlines for 2025 and 2026?

Most people think there's one FSA deadline. There are actually up to three, and they serve different purposes.

Plan year-end: For calendar-year plans, this is December 31. But plenty of employers run non-calendar plan years — July 1 through June 30, for example. Check your Summary Plan Description or ask HR if you're not sure.

Grace period end: Your employer may extend the window to *incur new eligible expenses* after the plan year closes. Per IRS Publication 969, the grace period can be no longer than 2.5 months. For a December 31 plan year, that's March 15. But not every employer uses the full 2.5 months, and some offer no grace period at all.

Run-out period end: This is different from the grace period, and honestly, the confusion between the two costs people money. The run-out period is a window to *submit claims* for expenses you already incurred before the deadline. The expense had to happen in time — you're just filing the paperwork late. Run-out periods are commonly around 90 days, but the length is employer-determined; the IRS doesn't set a universal maximum. Check your plan documents.

Here's what three common plan designs look like for a calendar-year plan:

• Carryover plan: Plan year ends December 31. No grace period. You can roll up to $680 into 2026 (per IRS Rev. Proc. 2025-32). Claims for December expenses are typically due during a run-out window your employer sets.
• Grace period plan: Plan year ends December 31. New expenses can be incurred through roughly March 15. Run-out period follows.
• Neither: Plan year ends December 31. Whatever is unspent is forfeited. A run-out period may still exist to file claims for expenses already incurred.

For 2026, the health FSA contribution limit is $3,400. If you're planning next year's election, that's the ceiling.

Where Does Forfeited FSA Money Actually Go?

Not to the IRS. That's the first thing to clear up.

When you forfeit FSA funds, the money stays inside the employer's benefit plan. IRS guidance gives employers a few permissible options for what to do with it: offset plan administrative costs, redistribute amounts to other participating employees (subject to IRS nondiscrimination rules), or keep it as general plan surplus. What employers cannot do is hand the money back to the specific employee who lost it. Once it's forfeited, it's gone.

In practice, most large employers use forfeited funds to cover the cost of administering the FSA — third-party administrator fees, debit card processing, claims adjudication. Smaller employers sometimes keep the surplus. Redistribution to employees happens, but it's less common because the mechanics are fussy.

This is almost never disclosed upfront in open enrollment materials. You can ask HR directly: "What does our plan do with forfeited FSA funds?" Your Summary Plan Description is also required to describe the plan's terms, so if you can get a copy, look for language about forfeitures. You may not love the answer, but at least you'll have a reason to spend that balance down.

How to Calculate Whether You'll Use Your FSA Before the Deadline — A Real Scenario

Say you have $1,200 left in your FSA with 10 weeks left in the plan year. You have a dental cleaning coming up ($120 after insurance, rough estimate), a prescription refill ($45), and nothing else on the calendar. That's $165 in known expenses — leaving more than $1,000 unaccounted for.

That's not a crisis. It's a shopping list.

Over-the-counter medications are FSA-eligible without a prescription — that status was made permanent and remains in effect for 2025 and beyond. Qualified medical expenses are defined under IRS Section 213(d); IRS Publication 502 has the full list. Categories worth checking for a quick spend-down:

• Contact lenses and solution (our guide on whether contact lenses are FSA eligible has the details)
• Reading glasses or prescription eyewear
• First-aid supplies — bandages, antiseptics, thermometers (see what's in a qualifying first aid kit)
• OTC allergy, pain, and cold medications
• Menstrual care products — eligible since 2020, confirmed for 2025 (full breakdown at our menstrual products guide)
• Sunscreen (SPF 15+, broad spectrum)
• Blood pressure monitors
• Heating pads

For a broader list of what qualifies, our complete guide to FSA-eligible items is the fastest reference.

One timing rule catches people: the expense must be *incurred* (the service rendered, the product purchased) within the plan year or grace period — not just billed within that window. A surgery that happens December 30 but gets billed in January is still eligible. An appointment scheduled for January 5 is not, even if you pay in December.

Log into your FSA portal or check your debit card transaction history to get an exact balance. Then do the math: known upcoming expenses minus current balance equals the gap you need to fill.

Carryover vs. Grace Period vs. Neither: A Side-by-Side Comparison

Employers can offer a carryover or a grace period — not both. That's an IRS rule, not a plan design quirk. Here's how the three options stack up.

Carryover

• How long: Indefinite into next plan year
• Dollar cap: Up to $680 for 2026, per IRS Rev. Proc. 2025-32
• New expenses: Cannot be incurred after plan year-end; only the balance carries forward
• Next-year contributions: Full contribution allowed up to the annual limit
• HSA impact: Carrying over any balance from a general-purpose health FSA into a new plan year disqualifies you from contributing to an HSA that year. A limited-purpose FSA (covering only dental and vision) does not trigger this restriction.

Grace period

• How long: Up to 2.5 months after plan year-end, per IRS Publication 969
• Dollar cap: No cap — you can incur any amount against the remaining balance during the grace period
• New expenses: Yes, new eligible expenses can be incurred during the grace period
• Next-year contributions: Full contribution allowed
• HSA impact: If you have any remaining balance (even $1) on the first day of the new plan year and a grace period is still open, you generally cannot contribute to an HSA until the grace period expires

Neither

• How long: Plan year-end is the hard stop (plus any run-out window to file existing claims)
• Dollar cap: N/A — forfeit everything unspent
• New expenses: Must be incurred by plan year-end
• Next-year contributions: Full contribution allowed; clean slate
• HSA impact: No impact if balance hits zero by year-end

For a deeper look at which option saves more in practice, the FSA grace period vs. carryover comparison walks through the scenarios. And for 2026 carryover specifics, the FSA carryover guide has the exact figures.

What Happens to Your FSA If You Leave Your Job?

This is where the FSA's front-loaded structure creates a real asymmetry. Most employees don't find out until it's too late.

If you leave your job mid-plan year, your health FSA coverage generally ends on your last day of employment (or the end of that coverage month, depending on plan terms — check your plan documents). Any unspent balance is typically forfeited at that point. You cannot take it with you.

However, COBRA continuation coverage does apply to health FSAs. If you elect COBRA, you can continue to access the account and incur eligible expenses through the remainder of the plan year. The catch: under COBRA, you pay the full annual election amount as premiums, often on a monthly basis, plus an administrative fee. Whether that's worth it depends on how much you have left and what expenses you expect.

The asymmetry runs the other direction too. FSAs are "uniformly available" — meaning if you elected $2,400 for the year and leave in February having spent $1,800, your employer generally cannot recoup the $600 overage. You got more than you paid in. The employer absorbs that loss. This is why FSAs front-load access: you're entitled to the full annual election from day one.

Dependent care FSAs work differently. Because they typically reimburse only up to what you've actually contributed, the front-loading rule doesn't apply the same way. The forfeiture mechanics are similar, but there's less risk of spending more than you've put in.

The practical advice is blunt: if you know you're leaving, schedule and pay for every eligible expense you can before your last day. A dental appointment, a new pair of glasses, a stockpile of eligible OTC medications. Once your coverage ends, the window closes.

FAQ: Use-It-or-Lose-It Questions People Actually Search

Q: Can I change my FSA contribution mid-year to avoid losing money? Generally, no. Under IRS Section 125 rules, you can only change your FSA election mid-year if you experience a qualifying life event — marriage, divorce, birth or adoption of a child, a spouse losing or gaining coverage, or a change in employment status, among others. "I think I over-elected" is not a qualifying event. If you're worried about forfeiture, your best move is spending down the balance, not reducing the election.

Q: Does the use-or-lose rule apply to dependent care FSAs the same way? Yes, and more strictly. Dependent care FSAs are subject to the same forfeiture rule, but carryover is generally not available for them. The IRS has not extended the same carryover flexibility to dependent care FSAs that it permits for health FSAs. Grace periods are possible if your employer offers one, but the norm is a hard stop at plan year-end. The cap on dependent care FSA contributions depends on your filing status and plan — confirm the current limit with your plan administrator.

Q: Have there been any recent changes to the use-or-lose rule? During the COVID-19 pandemic, the IRS issued temporary guidance allowing enhanced carryover and grace period flexibility. Those temporary measures have since expired. As of 2025, no permanent legislative change has expanded FSA flexibility beyond the existing carryover and grace period options. Congressional proposals surface periodically, but nothing has been enacted. The rules in place today are the pre-pandemic framework.

Q: What if my employer's plan year isn't January through December? Your actual deadline is your plan year-end date, not December 31. Find it in your Summary Plan Description, your employer's benefits portal, or by asking HR directly. Non-calendar plan years are common in certain industries. Once you know the end date, add 2.5 months to find the latest possible grace period expiration, and ask HR separately how long the run-out period is. Those three dates are your full deadline picture.