Flexible Spending Accounts: Use-It-or-Lose-It Rules and What's Covered

Pre-Tax Healthcare Spending—With a Clock Ticking

Americans forfeit an estimated $3 billion in FSA funds each year. The figure, drawn from research by benefits firm Alegeus, illustrates the most important thing to understand about a flexible spending account: unlike an HSA, an FSA is not a savings vehicle—it is a spending vehicle with an annual deadline. Money contributed to a health FSA must be used on qualified medical expenses within the plan year (with limited employer-granted extensions), or it is lost. Employers who administer FSAs are legally entitled to keep forfeited funds, and many do—using them to offset plan administration costs or subsidize other benefits.

The forfeiture structure is not a bug. Congress designed it intentionally.

The 2024 Health FSA Limit and Employer Rules

The IRS sets the annual health FSA contribution limit annually. For 2024, the limit is $3,200 per employee. This is an individual cap—a married couple where both spouses have access to FSAs through separate employers can each contribute $3,200, for a combined household total of $6,400.

Employers may contribute to employees' health FSAs as well, but employer contributions do not increase the $3,200 employee contribution limit; they are additive up to a combined total the employer establishes in the plan document. At the same time, some employers restrict contributions below the IRS maximum—check your specific plan documents.

The Use-It-or-Lose-It Rule and Its Exceptions

The fundamental rule: funds not used by the plan year deadline are forfeited. However, employers may—but are not required to—offer one of two relief provisions:

• Grace period: An additional 2.5 months (typically March 15 for a calendar year plan) during which prior-year funds can still be spent on new expenses. The maximum grace period is 2.5 months; employers cannot extend it further.
• Rollover option: Participants may carry over up to $610 in unused funds into the next plan year (2024 limit; indexed annually). This is not available simultaneously with a grace period—employers choose one or the other, or neither.

Employers cannot offer both a grace period and a rollover for the same plan. If your employer offers neither, any unspent balance at year-end is forfeited outright. Review your Summary Plan Description to understand which option, if any, applies to your plan.

The Uniform Coverage Rule: A Rarely Understood Benefit

One FSA feature that often surprises enrollees: the entire annual health FSA election amount is available on day one of the plan year, regardless of how much has been contributed through payroll deductions. If you elect $3,200 and on January 2 you incur a $3,200 eligible medical bill, you can submit it and receive reimbursement in full—even though you have only contributed one or two weeks' worth of deductions. The employer fronts the money and recoups it through remaining payroll deductions. This "uniform coverage rule" is not available for dependent care FSAs.

Types of FSAs

Eligible Expenses: IRS Publication 502

IRS Publication 502 governs which expenses qualify for FSA reimbursement. The list is extensive and includes some items that surprise people:

• Prescription medications and insulin (always eligible)
• Over-the-counter medications (eligible without prescription since CARES Act 2020—permanently)
• Menstrual care products (eligible since CARES Act 2020—permanently)
• Dental care: cleanings, fillings, orthodontia, crowns
• Vision: exams, glasses, contact lenses, LASIK surgery
• Hearing aids and batteries
• Acupuncture, chiropractic care (when medically necessary)
• Medical equipment: crutches, blood pressure monitors, glucose monitors
• Physical therapy, occupational therapy (with medical necessity)
• Smoking cessation programs and medications

The CARES Act of 2020 permanently expanded eligible OTC items to include any drug or medicine available without a prescription, eliminating the requirement for a physician's letter of medical necessity that applied from 2011 to 2019. FSA Stores and online platforms like FSAstore.com maintain searchable databases of eligible products that help participants spend remaining balances efficiently.

HSA Compatibility: The LPFSA Solution

A standard health FSA disqualifies you from contributing to an HSA because it creates "other coverage" that is not an HDHP. The Limited Purpose FSA solves this problem: restricted to dental and vision expenses, an LPFSA is specifically designed to pair with an HSA-eligible HDHP. A person enrolled in an HDHP can contribute to both an HSA and an LPFSA simultaneously—maximizing pre-tax healthcare spending without violating HSA eligibility rules.

Dependent Care FSA: Different Rules Entirely

The Dependent Care FSA (DCFSA) covers expenses for the care of qualifying dependents—children under 13 or a spouse or other dependent who is physically or mentally incapable of self-care—that enable the taxpayer to work or look for work. Day care, after-school programs, summer day camps, and elder day care facilities may qualify. The household limit is $5,000 (or $2,500 if married filing separately), and unlike health FSAs, the uniform coverage rule does not apply—funds must be in the account before reimbursement can occur. The DCFSA interacts with the Dependent Care Tax Credit; using both for the same expenses is not permitted, and a tax professional should evaluate which provides greater benefit based on income.

This article is for informational purposes only and does not constitute tax or legal advice. Consult your plan administrator and a qualified tax advisor for guidance specific to your FSA situation.