Among today’s employee benefits, Flexible Spending Accounts (FSAs) have become an increasingly popular choice. Yet few are familiar with the stipulations that govern them—including the IRS’s use-or-lose rule, a major FSA differentiator.
What is the use-or-lose rule, exactly? And what does it mean for the upcoming plan year?
Let’s dive into this crucial regulation—beginning with the basics.
What is an FSA?
A Flexible Spending Account is an employer-sponsored benefit that allows employees to set aside a desired portion of their pre-tax salary to pay for eligible medical or dependent care expenses. FSAs help participants save on income taxes to better pay for qualified out-of-pocket costs on healthcare, childcare, and more.What is the use-or-lose rule, and how does it work?
According to the IRS’s use-or-lose rule, participants must spend all of their FSA funds by the end of the FSA plan year. Unused funds are forfeited to the plan, barring specific exceptions (see the following few questions).Can any funds carry over into the following year?
In 2025, FSA participants may carry over up to $660 in tax-free funds at the end of their plan year into the following year's allocation—if their employer permits it. With this provision, eligible participants can avoid forfeiting unspent FSA dollars.What are grace periods and run-out periods?
Employers may provide a grace period, or an extension of time beyond the end of the regular plan year during which FSA participants can use FSA funds from the previous plan year to pay for new expenses in the new plan year. Grace periods can last up to 2½ months following the end of the initial plan year.The run-out period is an employer-determined time frame after the end of the plan year during which FSA participants can submit reimbursement claims for eligible expenses incurred during the plan year. (These are typically end-of-plan-year expenses participants have not yet submitted claims for.) During the run-out period, participants cannot incur new expenses.
An employer can choose to offer either a grace period or a carryover, but not both. Sometimes, an employer may offer neither, in which case any remaining funds in the FSA at the end of the plan year are forfeited.
Can participants change their FSA election (the amount they put into their account) during the plan year?
Usually, participants can only elect contributions to their FSA during open enrollment. However, some exceptions allow for mid-year contributions. These can include:- A change in marital status
- A change in the number of tax dependents
- Employment changes
- Residential changes (if they affect coverage eligibility)
