FSA planning: how to avoid use-it-or-lose-it

By Tom, CPA · Updated October 27, 2026

Part of: Easy Tax Strategies

TL;DR: A health FSA saves income tax and FICA on medical spending, but unused money is forfeited unless your plan has a carryover (up to $680 for 2026 plan years) or a grace period of up to 2.5 months, never both. Size your election from predictable costs, know your plan's deadlines, and spend down before you leave a job.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

The flexible spending account is a wonderful tax break with the personality of a parking meter. Feed it, use it, and it saves you roughly a quarter to a third of your medical spending in taxes. Forget about it, and in March you discover your money has been quietly confiscated, with the nearest pharmacy suddenly selling $214 of sunscreen, bandages and a single, very expensive thermometer.

Use-it-or-lose-it is real, but it is softer than its reputation, and with a bit of planning almost nobody needs to lose a dollar. Figures from IRS Rev. Proc. 2025-32, checked October 27, 2026. Part of easy tax strategies.

CPA Warning Label: Your plan document controls: the IRS allows a carryover or a grace period, but your employer decides whether to offer either, so read the plan summary before you elect.

Carryover vs grace

Section 125 cafeteria plans generally cannot let you keep unused money forever. The IRS allows employers to soften the rule in one of two ways (or neither), but not both for the same plan:

Separate from both is the run-out period: a window, often 90 days after year-end, to submit claims for expenses you already incurred during the year. A run-out does not let you incur new expenses. Many people lose money not because they did not spend it but because they did not submit the claims in time.

Election sizing

The best defense is electing the right amount in the first place. Build your number from costs you can predict:

• Recurring prescriptions (monthly cost × 12).
• Known deductibles and copays: count expected visits.
• Scheduled care: orthodontics, glasses and contacts, a planned procedure.
• Dental cleanings and fillings.
• A modest buffer for over-the-counter medicine and supplies.

Then, if your plan has a carryover, you can elect up to the predictable amount plus the carryover cap with little risk. If it has no carryover or grace, be more conservative.

The 2026 maximum salary reduction is $3,400. Your employer may set a lower cap. Employer contributions, where offered, can sit on top in some designs.

The uniform coverage advantage

Health FSAs have a quirk that works in your favor: the uniform coverage rule. Your full annual election is available from the first day of the plan year, even though you fund it a little each paycheck. If you elect $3,400 and have a $3,000 procedure in January, the plan pays it, and you keep contributing through payroll.

If you leave your job in February after spending the full election, you generally do not owe the plan the difference. That makes timing large planned expenses early in the plan year a legitimate tactic, especially if you might change jobs.

Eligible items

Health FSAs reimburse medical care expenses as defined in section 213(d), for you, your spouse and dependents. Common categories:

• Deductibles, copays and coinsurance.
• Prescriptions, and over-the-counter medicines without a prescription.
• Menstrual care products.
• Dental and vision care: cleanings, fillings, glasses, contacts, solution, and laser eye surgery.
• Medical equipment such as blood pressure monitors, thermometers and first-aid supplies.
• Sunscreen with broad-spectrum SPF 15+ is commonly treated as eligible by administrators.

Not eligible: insurance premiums, cosmetic procedures, general wellness items like gym memberships (absent a specific medical need documented by a provider), and expenses reimbursed by insurance. When in doubt, check your administrator's eligibility list. A dependent care FSA is a different account with different rules; see the dependent care FSA checklist.

Leaving a job

A job change is the most common way people forfeit FSA money.

• Coverage usually ends on your last day or the end of that month. Expenses incurred after that are not reimbursable.
• Spend down before you leave: schedule appointments, refill prescriptions and buy needed supplies while you are still covered.
• COBRA for the FSA: if you have contributed more than you have spent, you may be able to elect COBRA for the FSA and keep incurring expenses through year-end, paying the remaining contributions after tax plus a small admin fee. Run the math: it only makes sense if remaining eligible expenses exceed remaining payments.
• Submit claims within the run-out period.
• New employer FSA: you can usually elect again at the new job, and the $3,400 limit is per employer plan, but the two balances are separate and cannot be transferred.

Limits

• Health FSA salary reduction: $3,400 for plan years beginning in 2026 (up $100 from 2025).
• Carryover maximum: $680 for plan years beginning in 2026, if the plan permits carryovers.
• Dependent care assistance: $7,500 exclusion starting in 2026 ($3,750 married filing separately), up from $5,000, if your employer amends the plan; this cap is not indexed.
• Spouses: each spouse can elect up to the health FSA limit through their own employer.
• 2027: the IRS had not announced 2027 health FSA limits as of October 27, 2026.

Worked example

Illustration: Frugal Fran expects $1,200 for a prescription, $600 for two dental cleanings and a filling, $450 for new glasses and $400 of copays: $2,650 of predictable 2026 costs. Her plan offers a $680 carryover. She is in the 22% federal bracket and pays FICA of 7.65%.

• She elects $3,000: predictable costs plus a $350 cushion, well under the $680 carryover.
• Tax saved: $3,000 × (22% + 7.65%) = $889.50.
• Worst case: she spends only $2,650. The $350 remainder carries over to 2027. Nothing forfeited.
• If her plan had neither carryover nor grace period, electing $2,650 would have been safer; tax saved $2,650 × 29.65% = $785.73.

Compare that with paying out of pocket: every dollar of FSA-eligible spending costs her about 70 cents after tax.

Health FSA vs. HSA: which to pick

If your employer offers both an HSA-eligible plan and a general-purpose FSA, you usually have to choose. A side-by-side:

The HSA usually wins for people who can handle a higher deductible. The FSA shines with a low-deductible plan and predictable costs, or when a big expense is coming early in the year. Some people on an HSA plan also use a limited-purpose FSA for dental and vision, which stacks both. See opening an HSA.

Mistakes that cause forfeitures

• Electing for wished-for care. The dental work you keep postponing does not count until it is booked.
• Missing the run-out deadline for claims already incurred.
• Not knowing your plan's design. Carryover, grace, both absent: the strategy changes for each.
• Debit card substantiation. If the administrator asks for a receipt for a card swipe and you ignore it, the card can be suspended and the charge treated as ineligible.
• Forgetting that elections usually do not auto-renew. Many plans require a new election each open enrollment.

Year-end spend-down checklist

1. Log in to your FSA account in October and check your balance.
2. Submit any claims for expenses already incurred.
3. Schedule eye, dental and other appointments before the plan year ends (or the grace period ends).
4. Refill prescriptions and stock up on needed eligible supplies.
5. Note the run-out deadline on your calendar.
6. Then size next year's election from what you actually spent.