Your Flexible Spending Account [FSA] “Use It or Lose It” Rule – What You Need to Know

This is our annual reminder about spending your Flexible Spending Account dollars and setting your allotment for next year.

Based on a Treasury Department modification of the “use it or lose it” rule, some employers are allowing $500 to carry-forward from 2017 to 2018. That means you can carry over up to $500 in unused FSA funds from this year to the next.

For example, if you funded your FSA with $1,000 this year and only spent $500 from your FSA before the end of the calendar year, you can carry over the excess $500 into your FSA for next year—without forfeiting the money.

Of course, there is a catch: employers can either offer you the carryover option, or a grace period of up to two months and 15 days into the new year to use up the funds from the previous year—but you can’t have both.

Also, keep in mind that some employers don’t allow a grace period into the next year anyway, so December 31st is when you need complete your spending from your FSA. Consider this your cue to contact your benefits department and inquire about your current policy.

Use It Or Lose It Flexible Spending Account

Mrs. PT reminded me last night about how we used to sit down and reconcile our medical spending to our Flexible Spending Account reimbursements. This was a task we used to do annually to ensure we’d used all of our Flexible Spending Account funds.

We no longer do this since we’re self-employed and use a Health Savings Account instead. However, the FSA is still a relevant and useful account for many people.

When we had an FSA, this was our process: Each time we reconciled our spending, we would

  • review our current balance
  • get reimbursements for unclaimed expenses and, if needed
  • search for ways to use the remaining fund by the end of the year

Before I delve more into this process, let’s review what a Flexible Spending Account is.

What is a Flexible Spending Account?

With a Flexible Spending Account, you determine an amount that you will be used for eligible health and medical expenses for the year. This is capped at $2,600 for 2017.

This amount then gets deducted from your paycheck on a pre-tax basis (your gross pay). Not all at once, mind you. It’s divided amongst all of your pay periods for the year. What’s important to realize here is this money isn’t taxed which is why this is such a great benefit (it lowers your adjusted gross income)!

As you incur eligible expenses you can apply to the company that handles your FSA to get the money back. Usually, a receipt is used as proof. With my old company’s provider, I could fill out the form online and upload PDF’s of the receipts. It doesn’t get much easier. You can check with your HR/Benefits department to learn what your company system is.

A Flexible Spending Account is a nice way to maximize some tax advantages and save more money.

Use it or Lose it

As you know, most flexible spending accounts are “use it or lose it” type plans. You decided at the beginning of the year how much you’d like to contribute, tax-free, to your Flexible Spending Account. Then, you spend the rest of the year dipping into that savings to try and spend it all.

Before the current rule change, if you didn’t spend it all, not only did you miss out on the tax savings, but you lost your remaining funds. Not good! This is obviously the reason anyone talking about Flexible Spending Accounts is going to advise you to be ultra conservative when estimating your spending.

Thankfully, the rules have been modified and the government is now allowing (if the employer so chooses) $500 of unused funds to roll-over to the next year. But it’s important to remember that not all employers have implemented this rule change.

Checking the Balance

Most employers use a third-party company to run the employee flexible spending account. My old company used They had a website where I could sign into my account and review my FSA balance. If I’d spent all of my FSA funds, I could stop at this step. If not, I would need to claim some more spending.

Find Unclaimed Expenses

Have you spent money on qualifying medical expenses this year and not applied for reimbursement for those funds? Well, now is the time to do it.

I used to keep all my receipts from medical expenses in one spot. Around this time each year, I would sort through those expenses and make sure they are claimed against my flexible spending account funds.

Tip: If you don’t have your receipts, you could just as easily do a search for those expenses using your online bank account. Or, you could connect your bank account to an online aggregator, like Personal Capital. The aggregator will help you categorize your spending, making it easier to find unclaimed medical spending.

Don’t let those funds go to waste. Get out there and spend it wisely. And keep this in mind when adjusting your contributions for next year. You work hard for your money, so plan accordingly.

Adjusting Next Year’s FSA Allotment

If you find yourself with too much money in your FSA, maybe it’s time to consider reducing your allotment.

You usually get to adjust your flexible spending account only once a year, when your company has its benefits enrollment sign-up. It can be tough to figure out your health expenses but taking the time to crunch the number is worth the tax advantage.

But what happens if you discover you’re expecting a new baby after your enrollment period passes? Your health expenses will most likely be going up and it would be nice to adjust your flexible spending allotment.

You’re in luck!

There are a few situations in which you are allowed to change your election after the enrollment period ends. This includes marriage, divorce, and having a child (or adoption).

A Flexible Spending Account is a nice way to maximize some tax advantages and save you some money. With a new baby arriving you want to save all that you can!

Flexible Spending Account Regulation Changes Over the Years

Recently the federal government pulled back a lot of the allowable, eligible expenses that traditionally could be expensed through your FSA.

In the past, you could expense over-the-counter medicine and even things like band-aids and sunscreen. That is no longer the case. Now you have to pretty much stick to prescription medicine, glasses, and contacts, and hospital and doctor related expenses not covered by insurance. Refer to the IRS publication 502 for an outline of what you can claim.

Additionally, $2,600 is the cap limit for your Flexible Spending Account as of 2017.

Finally, the newest rule change would allow you to carry over $500 in unused funds from 2017 to 2018—but not all employers have implemented the rule.

The Bottom Line

The Flexible Spending Account is a great tool. Although ever-changing in terms of its ‘flexibility’ due to government regulation, it’s still a great way to save money on medical expenses. Use it (at least all but $500 now) or lose it.

If you have a Flexible Spending Account how do you keep track of your expenses? Can you offer any other tips for making the most of your flexible spending account funds?

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About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon.

He created Part-Time Money® back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence.


    Speak Your Mind


  1. I didn’t claim some of my FSA money so now it goes back to my employer. Since I work for a non-profit can I consider that a donation?

  2. Just an update: as today, November 17, 2012, we can buy band aids and sunscreen using FSA.

  3. Jimmy_Damintz says

    I am probably going to lose a significant amount of medical contributions as I lost a job in mid year and didnt have the expenses incurred to the point that I left.  Does anyone have any suggestions?

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  5. ShawnKoehler says

    Just completed open enrollment for benefits at work. I use a FSA , a fund to pay uncovered health care cost. Its a “use it or Lose it system” therefore hope my contribution estimates are not too much. Which brings me to wonder, who gets all that “extra” money from those who don’t “use it”?

    • Philip Taylor says

      @ShawnKoehler The FSA plan administrator keeps the money and uses it for admin expenses or to bolster next years’ fund (entire).

  6. ShawnKoehler says

    Who gets the funds if you do not “use it”. The insurance companies? The government ?

  7. @Pete – We’ve found that we didn’t do out homework when it came to the cost of delivery and all. We ended up running out and spending quite an amount on over the counter meds, band aids, etc.

    Be careful and set aside a place to keep all those receipts.

  8. I’m signing up for the FSA at my work for the first time this year. We know we’re going to have quite a few expenses this year due to the fact that we’re having our first child – so why not get some tax benefit!

    Sounds like the company running our plan has it so that you have to submit your expenses via fax, and then wait for a check reimbursement. Seems like an old fashioned way to do it, but oh well.

  9. I got the most for my flexible spending money at, a mail order pharmacy that also has great prices on over the counter stuff like diabetic supplies. They have free shipping on everything, and also have 90 day supply of generic meds for $9.50 (shipped free). Looks like they are licensed in most states and have cold and flu meds as well. They give away 100 free orders per month, so it’s not only a bargain, there’s a chance I get a free order!

  10. I’m not a big fan of the “use it or lose it” mentality. I dont want to lose it. not even a little of it.

  11. Excellent contributions, calshana. I checked my own company’s rules and they have a grace period like the one you mentioned. Nice.

    As for the FSA limitations resulting from the health care reform legislation, thanks for pointing it out. Help me understand why those are “reforms”… ??

  12. Most FSA plans now offer a 2.5 month grace period where you can incur expenses until March 15 of the following year. (i.e. March 15, 2010)

    As a future consideration, please be aware that in the health care reform legislation that looks likely to pass, FSA contributions will be limited to $2,000 and will exclude over the counter drugs. This looks like it will go into effect in 2011.