Unspent FSA Funds?

You know how I love to bring you my bad jokes. But something that’s NOT funny is unspent Flexible Spending Account (FSA) funds. FSAs are an effective way to save money on taxes while reserving money for out-of-pocket healthcare expenses. Your employer owns the account, which means they also own any unspent balance left over at the spending deadline. When does that happen? That depends on how your company’s FSA plan was set up. It’s essential to understand phrases like “use it or lose it,” “Carryover,” “grace period,” and “run-out.” So let’s talk about them.

FSA Provisions Explained

Use It or Lose It

This provision is very straightforward, and it works exactly how it sounds. You lose the unspent balance if you don’t spend your entire election amount by the plan year’s end. That’s why you need to carefully estimate the expenses you and your family will have over the year and make an election equal that estimate – up to the annual limit, that is.

The “use it or lose it” provision can be applied to Health FSAs, Limited Purpose FSAs (LPFSAs), and Dependent Care FSAs.

If you’re wondering how to estimate FSA elections, read How Much Should I Put in My FSA?

Carryover

Carryover allows FSA participants to “carry over” up to 20% of unspent FSA funds to the following year. If you elected $2.600 but only spent $2,300, you could carry over the remaining $300 to use next year. But if you elected $2,600 but only spent $1,500, you could only carry over up to $640 and the remainder would be forfeited to the employer. Plans vary by employer, and your plan’s carryover maximum may be lower than the regulatory maximum limit.

Carryover can be part of a Health FSA and LPFSA plan. If you have a Dependent Care FSA, carryover does not apply.

Grace Period

The grace period provision permits extra time after the plan year’s end to use any unspent money in your FSA (health or LPFSA). The grace period can be up to 2.5 months but may be shorter depending on the plan setup.

For instance, if your plan runs from January 1, 2023, through December 31, 2023, and offers a 2.5-month grace period, you have until March 15, 2024, to use your unspent FSA funds. Any unused FSA balance goes back to your employer after the grace period ends.

Run-Out

The run-out provision differs from a grace period, where you have extended time to spend your money. The run-out period is simply the amount of time you have after a plan year ends to file claims for eligible expenses incurred during the plan year. This provision applies to the Health FSA, LPFSA, and Dependent Care FSA.

Know What Happens to Your FSA Funds

Contact your benefits administrator or HR department or refer to your summary plan description to learn more about how your FSA plan treats unspent funds and other important provisions.