FSA Use It or Lose It: 5 Myths Behind the Average $404 Forfeiture
About four in ten people with a flexible spending account forfeited money in 2024, and the ones who did lost an average of $404 each, according to the Employee Benefit Research Institute’s analysis of more than 3.3 million accounts. Most of that loss comes from one half-understood phrase: the FSA use it or lose it rule. In this guide you’ll learn what the rule actually says, the five myths that cause people to forfeit (or to under-contribute out of fear), and a simple year-end plan for draining your balance before your deadline.
The timing matters. Most health FSAs run on a calendar plan year, open enrollment for 2027 is happening right now at a lot of employers, and the IRS just announced on November 5 that the 2027 health FSA contribution limit rises to $3,500, with a maximum carryover of $700 (up from $3,400 and $680 for 2026). So you’re probably making two decisions at once: how to spend down this year’s balance, and how much to elect for next year. Both get easier once the myths are out of the way.
What the FSA Use It or Lose It Rule Actually Says
The rule comes from Section 125 of the tax code, which governs cafeteria plans. Money you put into a health FSA goes in before federal income tax, Social Security and Medicare tax. In exchange for that tax break, the IRS doesn’t let the account become an open-ended savings vehicle. Contributions are tied to a single plan year, and anything you don’t spend on qualified expenses by the plan’s deadline goes back to the employer.
That’s the strict version, and it was the only version for decades. But the IRS has softened it twice. In 2005 (Notice 2005-42) it allowed employers to add a grace period of up to two and a half months after year-end to incur new expenses. In 2013 (Notice 2013-71) it allowed a carryover of a limited amount into the next plan year, originally $500 and now indexed to inflation. Employers can offer one of these, but not both, and they’re also free to offer neither.
That last sentence is where most of the confusion lives. “Use it or lose it” is a federal ceiling on how flexible an FSA can be, not a description of how your specific plan works. Here’s how the three possible setups compare.
| Plan design | What happens to leftover money | Deadline to incur expenses | Best for |
|---|---|---|---|
| Carryover | Up to $680 of 2026 money rolls into 2027 ($700 limit for 2027 money rolling into 2028); anything above is forfeited | December 31 for the full balance; carried amount is usable all next year | People with steady, predictable medical spending |
| Grace period | No dollar cap, but expenses must be incurred within the extra window | Up to March 15 of the following year (for calendar plans) | People with a large expense that might slip into early next year |
| Neither | Everything unspent is forfeited | December 31 (for calendar plans) | Conservative electors who only fund known costs |
EBRI’s data shows that the design shifts behavior a little: average 2024 contributions were $1,489 for accounts with a grace period versus $1,365 for accounts with neither feature. Knowing your plan’s version is step one. With that framework in place, here are the myths.
Myth 1: “December 31 Is the Deadline for Everyone”
For a lot of people it is, but not for all of them. If your plan has a grace period, you can keep incurring eligible expenses through mid-March and pay them from the prior year’s balance. If your plan has a carryover, December 31 is the deadline only for the portion above the carryover cap.
There’s also a third date that people mix up with the other two: the run-out period. That’s the window after the plan year ends in which you can still submit claims for expenses you already incurred. Many plans give you until somewhere in the first few months of the next year. A run-out period does not let you buy anything new; it only lets you file the paperwork late. If you bought glasses on December 20 and forgot to submit the receipt, the run-out period saves you. If you plan to buy glasses on January 10, only a grace period helps.
The fix is boring but effective: open your plan’s summary plan description (or the benefits portal FAQ) and write down three things. Does the plan have a carryover, a grace period or neither? What is the last day to incur expenses? What is the last day to submit claims?
Myth 2: “Only Doctor Bills and Prescriptions Count”
This one causes a lot of December panic, and it’s been outdated since 2020. The CARES Act permanently made over-the-counter medicines eligible without a prescription and added menstrual care products to the list. That means pain relievers, allergy medicine, cold and flu treatments, antacids and similar staples can all be bought with FSA money.
Beyond the pharmacy aisle, IRS Publication 502 defines medical expenses broadly. Common eligible items people overlook include:
- Prescription glasses, contact lenses, contact solution and reading glasses
- Dental work, including fillings, crowns and orthodontia
- Copays, deductibles and coinsurance for you, your spouse and your dependents
- First-aid supplies, bandages, thermometers and blood pressure monitors
- Sunscreen labeled as broad-spectrum SPF 15 or higher (many administrators treat it as eligible; check yours)
What doesn’t count: insurance premiums, cosmetic procedures, and general wellness purchases like gym memberships or vitamins taken for general health unless a doctor prescribes them for a specific condition. When in doubt, your administrator’s eligibility list is the final word, because it reflects how they’ll actually adjudicate a claim.
Myth 3: “The FSA Use It or Lose It Rule Means You Should Contribute Almost Nothing”
Fear of forfeiting pushes a lot of people to elect a token amount, and the data hints at this. EBRI found the average 2024 contribution was $1,431, less than half the $3,200 limit that applied that year. Younger workers are especially cautious, and still lose money anyway: account holders under 25 contributed an average of just $623, yet about two-thirds of them forfeited something, compared with 36% of account holders 65 and older.
The better way to think about it is as a math problem. Every dollar you run through an FSA avoids income tax and the 7.65% employee share of Social Security and Medicare. If you’re in the 22% federal bracket, that’s roughly 30 cents saved per dollar before counting state tax. So forfeiting $100 is worth it if it let you shelter several hundred dollars you were going to spend anyway. The goal isn’t to forfeit zero; it’s to set an election you’re confident you’ll spend.
A practical approach is to add up your near-certain expenses for next year (recurring prescriptions, planned dental work, contacts, known copays for ongoing care), elect that amount, and only add a cushion equal to your plan’s carryover cap if your plan offers one. That cushion can’t be lost in a carryover plan, because it simply rolls forward.
I came to FSAs the same way I came to most of my money decisions: by building a spreadsheet out of mild irritation. As a software engineer, I’m used to treating a “rule” as a spec to read carefully rather than a vibe, and when I actually read my plan document I realized I’d been under-electing for years out of a fear the plan design didn’t justify. I now pull the last twelve months of medical receipts from my card statements in late fall, sum the recurring ones, and elect that. It’s not glamorous, but it’s the same DIY, data-first approach I use for index funds and tax-advantaged accounts, and it has consistently beaten guessing.
Want to see where predictable medical costs fit into next year’s monthly spending?
Myth 4: “Carryover Money Is Free Money With No Strings”
Carryover is genuinely helpful, but it has a catch that trips up people moving to a high-deductible plan. Under IRS rules, if you have leftover money in a general-purpose health FSA that carries into the new year, that FSA counts as other health coverage, which makes you ineligible to contribute to a health savings account. Notice 2013-71 addresses this directly, and employers can solve it by moving your carryover into a limited-purpose FSA (dental and vision only) or by letting you decline the carryover.
This matters most during open enrollment. If you’re weighing the switch we covered in our HDHP vs PPO break-even analysis for 2027 open enrollment, a stray $200 carryover could block an HSA contribution that’s worth far more over time. The HSA’s triple tax advantage is exactly why: unlike an FSA, HSA dollars never expire and can be invested. If you’re deciding between the two account types, our HSA vs FSA comparison walks through the tradeoffs side by side.
The simple rule: if you’re switching to an HSA-eligible plan next year, spend your general-purpose FSA down to zero by December 31, or confirm in writing how your employer handles the carryover.
Myth 5: “My Dependent Care FSA Works the Same Way”
It doesn’t, and the difference got more important this year. Dependent care FSAs fall under Section 129, not the health FSA rules. The One Big Beautiful Bill Act raised the dependent care FSA limit from $5,000 to $7,500 per household beginning in 2026, the first increase since the limit was set at $5,000 in the 1980s. But the carryover feature that exists for health FSAs isn’t available for dependent care accounts. A plan can offer a grace period, but there’s no indexed carryover amount.
There’s another structural difference. A health FSA follows the uniform coverage rule: your full annual election is available on the first day of the plan year, even before you’ve contributed it. A dependent care FSA only reimburses up to what you’ve actually contributed so far. So a dependent care election should be sized to childcare costs you’re nearly certain to pay, and you should weigh it against the federal Child and Dependent Care Credit, which we break down in our guide to dependent care FSA vs the tax credit.
What to Do Instead: A Year-End FSA Spend-Down Plan
Once you set the myths aside, beating the FSA use it or lose it rule comes down to a short checklist you can finish in an afternoon.
- Log in and check your balance today. Note your available balance, any pending claims, and your plan’s carryover or grace period terms.
- Submit every receipt you already have. Old pharmacy receipts, copays and dental bills from earlier in the year are the most common source of “forfeited” money that was never actually unspent.
- Schedule care you were going to get anyway. An eye exam, a dental cleaning or a follow-up visit before your deadline turns leftover dollars into care you needed.
- Restock essentials, but don’t hoard. Replacing contact lenses, first-aid supplies and OTC medicine you’ll use within the year is reasonable. Buying gadgets you’ll never use just shifts the loss from your employer’s ledger to your closet.
- Set next year’s election from data. Use the past year’s receipts, add known planned expenses, and cap the cushion at your plan’s carryover amount.
This is less about tax tricks and more about removing friction. As we’ve noted when discussing money psychology, most financial leaks happen because a decision is inconvenient, not because people don’t care. An FSA deadline is just a reminder that convenience has a dollar value.
Frequently Asked Questions
Can my employer keep the money I forfeit from my FSA?
Yes. Forfeited health FSA funds revert to the employer. Under IRS rules, the employer can use them to offset plan administration costs or reduce future employee contributions, but cannot return them to you individually based on how much you forfeited.
What happens to my FSA if I leave my job mid-year?
Typically, coverage ends on your last day (or the end of that month), and only expenses incurred while you were covered are reimbursable. Because of the uniform coverage rule, if you’ve spent more than you’ve contributed so far, you generally don’t have to pay the difference back. If you’ve spent less, the unused balance is usually forfeited unless you elect COBRA continuation for the FSA.
Can I change my FSA election in the middle of the year?
Only after a qualifying life event, such as marriage, divorce, the birth or adoption of a child, or a change in employment status that affects eligibility. Outside those events, your election is locked for the plan year, which is why sizing it carefully during open enrollment matters so much.
Sources: Employee Benefit Research Institute FSA database analysis of 2024 account data (published October 2026); IRS 2027 cost-of-living announcement for health FSAs (November 5, 2026) as reported by SHRM; IRS Notices 2005-42 and 2013-71; IRS Publication 502; CARES Act (2020); One Big Beautiful Bill Act (2025). This article is educational and not tax advice.
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