FSA Grace Period vs. Carryover Option: What to Know Before Your Funds Expire
Key takeaways:
Flexible spending accounts (FSAs) come with a “use it or lose it” rule, which means any unspent funds may be forfeited at the end of the plan year.
Some employers offer a grace period to give you extra time to use your FSA funds.
If your employer doesn’t offer a grace period, they may offer a carryover option. For 2024, the IRS allows you to carry over up to $640 to the next plan year. But the total amount you can carry over is up to your employer
Table of contents
Flexible spending accounts (FSAs) offer one way to use pretax dollars to pay for qualified healthcare expenses such as prescription eyeglasses and acupuncture. However, if you don't use the money in your FSA by a certain time, you might lose it.
Usually, FSA funds expire at the end of a plan year. But some employers offer a grace period or a carryover option to give you more time to spend your funds.
How does the FSA grace period work?
In 2005, the IRS issued Notice 2005-42, which allows employers to amend their cafeteria plans to include a grace period. Cafeteria plans are benefit programs that let employees choose from a menu of pretax benefits like health FSAs and dependent care FSAs. These plans can help lower employees’ taxable income and offer access to tax savings on eligible expenses.
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Grace periods give employees extra time — up to 2.5 months after the end of a plan year — to spend any leftover FSA funds on qualified healthcare expenses. So if your plan year ends on December 31, you might have until March 15 to spend your remaining FSA dollars on items such as prescription medications, dental expenses, and prescription sunglasses with a grace period. Essentially, grace periods help prevent employees from losing unused funds due to the “use it or lose it” rule.
If an employer offers a grace period, it applies to all employees enrolled in an FSA on the last day of the plan year. This includes employees who are covered under COBRA, or the Consolidated Omnibus Budget Reconciliation Act. Even if an employee leaves the company during the grace period, they can still use their remaining FSA funds up until the deadline.
Employers can decide which types of benefits the grace period applies to, however. For example, if a cafeteria plan offers both a health FSA and a dependent care FSA, the employer could choose to extend a grace period only to health FSA enrollees. And while a grace period cannot extend beyond March 15, it can end earlier if the employer chooses.
Do all FSAs have grace periods?
No, not all FSAs have grace periods. It’s up to individual employers to decide if they want to provide this option. Check with your human resources department to see if your FSA has a grace period.
How long do you have to spend leftover FSA money?
If you have extra money remaining in your FSA after the plan year ends, it’s important to know what your options are. As mentioned, your employer might offer one of two options:
A grace period: This gives you up to 2.5 months after the plan year ends to spend the remaining money in your FSA.
A carryover option: This lets you move some funds to the following plan year.
Do you have a flexible spending account (FSA)? Learn how FSAs work, so you can avoid losing any unused funds in your account.
Need to use your FSA funds before the deadline? Check out this list of FSA-eligible items, which includes everything from vision care items to prescription medications.
Surprising FSA items: Beyond the dozens of everyday items that you might already know about, there are some surprising expenses, such as certain types of lip balm and sunscreen, that may also qualify for tax-free spending.
Your employer can only offer one of these options, not both. Though, they may choose not to offer either a grace period or a carryover option. If so, you’ll need to make sure you spend your FSA dollars within the plan year to avoid losing them.
How does the FSA carryover option work?
The FSA carryover option allows you to transfer remaining funds, up to a certain limit, into the next plan year. For example, for 2025, you can carry over up to $660 in unused FSA funds into 2026. For 2024, you can carry over up to $640 in FSA dollars into 2025, if your employer allows it.
Keep in mind that the amount you carry over will not affect the maximum amount you can put into your FSA the following year. Even if you carry over $640 from 2024 into 2025, you can still contribute up to $3,300 to your FSA through payroll deductions during the 2025 plan year.
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The IRS sets the maximum carryover limit for FSAs, and this amount can change every year. The limit is equal to 20% of the yearly FSA contribution cap. For 2024, the annual contribution limit is $3,200, making the carryover limit $640 — or 20% of the contribution cap.
Below is a table that shows the maximum contribution and carryover limits for health FSAs from 2019 through 2025. In recent years, the annual contribution limit has often increased by $50 to $100 from year to year. However, there were more significant increases in 2023 and 2024 because of record inflation.
Also, keep in mind that Congress temporarily changed the carryover rules for 2020 and 2021 as part of COVID relief, allowing employees to roll over their entire FSA balance if their employer allowed it.
FSA plan year | Maximum health FSA contribution per person | Maximum allowed carryover per person |
|---|---|---|
$3,300 | $660 | |
$3,200 | $640 | |
$3,050 | $610 | |
$2,850 | $570 | |
$2,750 | $550 | |
$2,750 | $550 | |
$2,700 | $500 |
Source: IRS
What happens to unused FSA money?
Unspent FSA funds typically go back to employers. Employers might use these funds to cover administrative costs associated with third-party vendors managing their FSAs or to reduce future FSA costs. Like employees, employers must follow specific rules set by the IRS regarding use of FSA funds.
Losing FSA funds is not ideal, so here are some steps to help you avoid it:
Look into whether your FSA has a grace period or carryover option. Find out if your employer offers a grace period to give you extra time to use your funds or a rollover option to allow you to move some funds to the next plan year.
Find out what items count as qualified medical expenses. There are dozens of eligible expenses that can help you use up your remaining balance. Some surprising FSA-eligible items include certain types of lip balm and sunscreen. Keep in mind that some products and services may require a letter of medical necessity to qualify. And contact your FSA provider if you have questions about an expense’s eligibility.
Plan ahead for next year. Look back at your out-of-pocket expenses from the past year and consider any upcoming healthcare costs to help estimate how much to contribute to your FSA in the new plan year. This will help you avoid overfunding your FSA and increasing your chances of losing funds.
Does the duration of FSA grace periods change from year to year?
If an employer chooses to offer a grace period, they can give employees up to 2.5 months of additional time to spend the money in their accounts. This does not usually change from year to year.
Although the length of grace periods is consistent, other FSA provisions, such as maximum contribution and carryover amounts, are typically adjusted every year. So it’s a good idea to check with your employer and FSA provider for the latest guidelines.
How can you use FSA funds?
You can use your FSA funds to pay for eligible expenses not covered by other health plans. Many FSA providers offer enrollees a debit card to make purchases with. Alternatively, you can pay out of pocket and submit receipts, along with any other required documentation, for reimbursement.
If you’re looking for ways to use your funds before they expire, here are some common FSA-eligible expense:
Acne treatments, including pimple patches and facial cleansers
Blood pressure monitors
Crutches
Tylenol and other over-the-counter medications
Some of these items may require a letter of medical necessity to qualify, so double check with your FSA provider.
The bottom line
Flexible spending accounts (FSAs) are known for their "use it or lose it" feature. But your employer might give you more time to spend your FSA funds after the plan year ends. They can offer either a grace period or a carryover option — but not both.
Before the plan year ends, check your FSA balance and plan how you’ll use any remaining funds before the deadline. And make sure you understand how your FSA plan works to avoid losing any money.
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References
Brown, K. M. (2007). Employee benefits—cafeteria plans. Federal Registrar.
HealthCare.gov. (n.d.) Using a flexible spending account (FSA).
Internal Revenue Service. (2017). Internal Revenue Bulletin: 2005-49.
Internal Revenue Service. (2018). IRS provides tax inflation adjustments for tax year 2019.
Internal Revenue Service. (2019). IRS provides tax inflation adjustments for tax year 2020.
Internal Revenue Service. (2020). IRS provides tax inflation adjustments for tax year 2021.
Internal Revenue Service. (2021). IRS provides tax inflation adjustments for tax year 2022.
Internal Revenue Service. (2021). Notice 2021-15.
Internal Revenue Service. (2022). IRS provides tax inflation adjustments for tax year 2023.
Internal Revenue Service. (2023). IRS provides tax inflation adjustments for tax year 2024.
Internal Revenue Service. (2024). IRS: Healthcare FSA reminder: Employees can contribute up to $3,300 in 2025; must elect every year.
Internal Revenue Service. (2024). IRS releases tax inflation adjustments for tax year 2025.
Internal Revenue Service. (2024). Publication 15-B (2024), employer's tax guide to fringe benefits.
This article is solely for informational purposes. This article is not professional advice concerning insurance, financial, accounting, tax, or legal matters. All content herein is provided “as is” without any representations or warranties, express or implied. Always consult an appropriate professional when you have specific questions about any insurance, financial, or legal matter.
