The “use it or lose it” rule, in one paragraph
The IRS designed Flexible Spending Accounts as a tax-advantaged benefit you spend down within the plan year. In exchange for letting employees set aside pre-tax dollars for healthcare, the IRS requires that any leftover money at the end of the plan year (plus any plan-specific extensions) be forfeited back to the employer. You cannot get it back as cash. Your employer cannot give it back as cash. That’s the trade-off.
Nationally, this rule causes Americans to forfeit an estimated $4–5 billion every year — money already earned, already deducted from paychecks, and then lost.
Where forfeited FSA money actually goes
When your FSA balance is forfeited, the dollars go back into the employer’s general FSA plan assets. IRS rules give the employer three options for what to do with it:
- Cover plan administration costs. FSAs cost money to administer — the third-party administrator (HealthEquity, WEX, Optum, etc.) charges per-participant fees. Forfeited funds can offset those costs.
- Redistribute to remaining participants on a uniform basis. Some plans take the forfeited pool and distribute a flat amount to every plan participant (e.g., a $50 employer credit to next year’s FSA). This is uncommon but allowed.
- Retain as employer funds. If the plan document doesn’t specify, the leftover money simply stays with the employer.
What employers cannot do is cherry-pick — they can’t refund forfeited money only to specific employees, and they cannot return it in cash to the original contributors. The IRS treats these dollars as plan assets, not your personal property, the moment they’re forfeited.
The two ways to keep your money: grace period and carryover
The IRS allows employers to attach one of two relief features to a Health FSA. They cannot offer both at once.
Grace period (up to 2.5 months)
A grace period extends your spending window by up to 2.5 months after the plan year ends. For a calendar-year plan, that pushes your effective deadline from December 31 to March 15 of the following year. Funds spent during the grace period count against the prior plan year’s balance — they don’t reset.
About 40–50% of FSA plans offer a grace period.
Carryover (up to $680)
Carryover lets you roll forward a capped amount of unused funds into the next plan year. For plan years beginning in 2026, the IRS limit is $680. Anything above that is forfeited. Carryover funds merge with your next year’s balance and follow the next plan year’s rules.
About 30–40% of FSA plans offer carryover. The remaining 10–20% offer neither.
For a deeper breakdown of how to tell which one your plan has, see When Does My FSA Expire?.
Why this rule exists at all
The forfeiture mechanic is the cost of the FSA’s biggest perk: you get the entire annual election on day one of the plan year. If you elect $3,000 and spend it on an MRI in January, you owe back nothing — even though you’ve only contributed a fraction of it through payroll deductions. The IRS calls this the “uniform coverage rule,” and it’s why FSAs are useful for predictable, front-loaded medical expenses.
To balance that risk, the IRS lets the employer keep what isn’t spent. Without forfeiture, FSAs would functionally be no-strings-attached cash transfers, which is not how the tax code is structured.
How much money is actually forfeited
Industry estimates put national FSA forfeiture at $4–5 billion per year. The average household-level loss varies widely:
- Households with predictable medical spending (ongoing prescriptions, planned procedures, dependents in glasses or braces) tend to forfeit close to $0 — they spend the full election by design
- Households that elected aggressively without a clear plan tend to forfeit $400–500 on average
- A meaningful minority — somewhere around 10–15% of FSA participants — forfeits more than $1,000 in a year
The pattern is consistent: people don’t realize how broad the eligible product list is, they hit late November still holding 30–50% of their election, and they run out of time to spend it on items that genuinely improve their household.
Strategies to avoid losing your money
1. Plan early — but spend late
If you’re holding a balance in October or November, you have plenty of time to spend it on items you’d buy anyway. The trap is waiting until December 28 and discovering your favorite purchases are out of stock or won’t ship in time.
2. Know what’s eligible
Most people undercount what their FSA covers. Beyond prescriptions and copays, the eligible list includes sunscreen (SPF 15+ broad spectrum), first aid kits and thermometers, contact lens solution and reading glasses, pain relievers and allergy meds, heating pads and braces, therapy and teletherapy copays, and many baby and feminine care products.
3. Use the balance tool
Enter what’s left and we’ll generate a curated bundle of eligible products that adds up to your balance, weighted toward items most households actually use. Open the balance tool.
4. Don’t ignore services
If you’re sitting on $400+ and stocking up on consumables feels excessive, FSA dollars also cover services: dental cleanings, eye exams, physical therapy, acupuncture, chiropractic visits, and therapy sessions. Booking a procedure for late December is often the highest-value way to clear a high balance.
5. Time the deadline yourself
Set a calendar reminder for November 1. By then you should know exactly what your remaining balance is, and you have 60 days to convert it to products and services. Waiting until December 26 is when forfeiture starts to feel inevitable.
6. Adjust next year’s election
If you forfeited money this year, you elected too much. At next open enrollment, drop your contribution to match what you actually spent. The savings on tax-advantaged spending only matters if you spend the money — losing $500 to forfeit a $130 tax savings is a bad trade.
What if my plan year already ended?
If your plan year is already over and you’re past any grace period, the money is gone. There’s no appeal process and no late-claim option past the runout period (typically a 60–90 day window after plan year end during which you can submit receipts for already-incurred purchases — not new ones).
If you’re still in the grace period or have carryover funds, you have options. Check what’s eligible and start spending.
Don’t lose money you’ve already earned
Forfeiture is the most preventable loss in personal finance — the products are real, the eligibility list is broad, and your own dollars are sitting there waiting. Use the balance tool to see what your remaining balance can buy in five minutes.