How the FSA use-it-or-lose-it rule actually works in 2026
Key takeaways
- Unspent FSA money is forfeited when the plan year ends, and the balance goes back to your employer under IRS rules.
- Employers may add one safety valve: a 2.5-month grace period or a carryover of up to $680 for 2026, but never both.
- About 4 in 10 FSA holders forfeited money in 2024, losing an average of $404, per EBRI research released in October 2026.
A flexible spending account, or FSA, lets you set aside part of your pay before taxes to cover medical costs. The trade-off is the use-it-or-lose-it rule: money you do not spend by the plan deadline is forfeited. This article explains how the forfeiture rule works, the two exceptions employers can add, where forfeited money goes, and how to plan so you keep more of your balance.
This is general information about how FSA rules work, not financial or tax advice.
How the forfeiture rule actually works
The rule comes from the tax code itself. FSAs live inside Section 125 cafeteria plans, which federal law forbids from working like long-term savings vehicles, according to LegalClarity's review of the statute. IRS Publication 969 states the mechanics plainly: distributions from a health FSA may reimburse only qualified medical expenses incurred during the period of coverage.
When the plan year ends, anything left over reverts to the employer. You do not get a check, and the money does not automatically roll into the next year. IRS Notice 2013-71, which modified the rule, uses the phrase "use-or-lose" in its title.
The default is strict. There is no appeal process and no hardship exception for leftover funds. Your employer has no authority to waive the forfeiture, even for federal workers.
One common confusion: the deadline follows your plan year, not always the calendar year. Many employers run a calendar-year plan ending December 31, but some do not. Check your plan's summary document before building a December spending plan.
The scale of the losses is large. New research from the Employee Benefit Research Institute, released October 21, 2026, found that about 4 in 10 FSA holders forfeited unused funds in 2024. Those who lost money gave back an average of $404, down from $436 in 2023. The analysis drew on more than 3.3 million accounts holding over $3.9 billion in contributions. Money's reporting on the same research puts the nationwide forfeiture total at between $4 billion and $5 billion per year.
"The decline in average forfeitures is encouraging," Jake Spiegel, senior research associate for health and wealth at EBRI, said in the institute's news release. The data also show who loses most: two-thirds of account holders under age 25 forfeited funds in 2024, compared with 36 percent of those age 65 and older.
For 2026 plan years, the IRS set the maximum employee contribution at $3,400 per Revenue Procedure 2025-32. EBRI found the average contribution in 2024 was $1,431, and 89 percent of holders took at least one distribution averaging $1,503.
The two exceptions your employer can add
Employers can soften the deadline in one of two ways. Neither is guaranteed. Some employers offer neither.
A grace period gives you extra time to incur new expenses against the old balance. The cap is set by IRS Notice 2005-42: the grace period must end no later than the 15th day of the third calendar month after the plan year ends. For a calendar-year plan, that means March 15.
A carryover lets unused dollars move into the next plan year, up to an inflation-adjusted ceiling. For 2026 plan years, that ceiling is $680, up from $660 for 2025. Anything above the cap is forfeited, and your employer can set a lower limit.
A plan can offer the grace period or the carryover, but never both. Notice 2013-71 closed the door on stacking them. Also note the difference from a run-out period, which is a separate window to file claims for expenses already incurred during the plan year, not to incur new ones.
Dependent care FSAs follow different rules. For 2026, the contribution limit is $7,500 per household, or $3,750 if married filing separately. A dependent care FSA can offer the 2.5-month grace period, but the IRS carryover provision applies only to health care FSAs, per the Tripl summary of IRS guidance.
HSAs are a different animal entirely. Publication 969 says HSA balances are generally carried over from year to year with no December 31 problem.
The trade-off is eligibility: you need a qualifying high-deductible health plan to contribute. If you want a savings-style account that compounds like a high-yield savings account, an HSA is closer to that model than an FSA.
Where forfeited money really goes
Forfeited dollars revert to the employer, but the employer cannot just pocket them freely. Under cafeteria plan rules, forfeitures can be used in limited ways on a uniform, nondiscriminatory basis.
One permitted use is reducing what employees must contribute in a future year to reach a given balance, as described in the EFPR Advisory summary of forfeiture rules. For example, employees might contribute $950 to get a $1,000 balance, with the $50 gap funded from prior forfeitures.
Employers can also return amounts to participants, but those returns are typically treated as taxable wages, which erases much of the benefit. What they cannot do is refund money based on individual claims experience, rewarding some workers and not others.
This is why the deadline deserves respect. The money does not vanish into thin air; it flows back to the plan, and you lose the tax advantage you contributed for.
How to plan around the deadline
Start by reading your plan documents. Confirm your exact plan year end date, whether you have a grace period or carryover, and the claims-filing window. A calendar-year plan with a full grace period effectively gives you until March 15 to incur expenses; with carryover, you only need to spend down to the $680 ceiling.
Then forecast conservatively. The IRS cap for 2026 is $3,400, but EBRI found only 5 percent of holders contributed the 2024 maximum of $3,200. A contribution near your predictable costs beats maxing out the account and scrambling in December.
Keep a list of eligible expenses ready. Prescription drugs, dental work, vision care, and many over-the-counter items qualify, per IRS Publication 502 and related FAQs. A pharmacy run in December is a legitimate way to use a small remaining balance, provided the expenses are incurred before the deadline.
File claims promptly. EBRI's December 2024 research found that workers who manually submitted at least one expense claim were 13 percentage points less likely to forfeit money, and their average forfeiture was $114 less than workers who relied only on automatic substantiation.
Frequently asked questions
What is the FSA use-it-or-lose-it rule?
It is the IRS requirement that unspent health FSA money is forfeited at the end of the plan year, unless your employer offers a grace period or carryover. The rule exists to keep FSAs from functioning as tax-free savings accounts.
Can my employer give me both a grace period and a carryover?
No. IRS Notice 2013-71 permits a health FSA plan to offer either the grace period or the carryover provision, not both. Your plan's summary document says which one, if any, applies.
What is the FSA carryover limit for 2026?
Up to $680 of unused 2026 money can carry into the next plan year, per IRS inflation adjustments. Amounts above the ceiling are forfeited, and employers may set a lower cap.
Do I lose FSA money if I leave my job?
Generally yes, with narrow exceptions such as COBRA continuation. Unlike an HSA, an FSA balance is tied to your employment and the plan year, so separation usually means forfeiture of unspent funds.
The bottom line
The use-it-or-lose-it rule is simple at its core: spend your FSA balance by the deadline or hand it back. The 2026 figures give you concrete targets, with a $3,400 contribution cap, a $680 carryover ceiling, and a March 15 grace period cutoff for calendar-year plans.
Check your plan's exact terms during open enrollment, contribute near your predictable medical costs, and file your claims early. Related reading on how money compounds when it is not forced through a deadline: how compound interest works in a savings account. For a sense of how fees and rates interact with balances, see APR vs effective annual rate.
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Image Credits: Wikimedia Commons / Wellcome Collection, Solomon203, Rxcare
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