Yes, you really do lose it. Any FSA balance left over at the end of the plan year — above whatever carryover your employer allows — is forfeited back to your employer under the IRS use-it-or-lose-it rule. No refund. No appeal. No tax deduction for the loss.
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The use-it-or-lose-it rule is rooted in IRS regulations for cafeteria plans, governed by Section 125 of the Internal Revenue Code. Because FSA contributions are deducted from your paycheck before federal income, Social Security, and Medicare taxes, the IRS originally required any unused balance to be forfeited at plan year end — otherwise FSAs would function as an unlimited tax-advantaged savings account.
In 2013, the IRS softened the rule. Employers can now offer either a grace period of up to 2.5 months, or a carryover of up to a set dollar amount ($660 for 2025, $680 for 2026 per IRS adjustment), into the following plan year. But they cannot offer both, and they are not required to offer either.
Forfeited balances revert to the employer that sponsors the plan. Under IRS rules, employers have three options for what to do with the money:
The most common use. Forfeited funds pay for the administrative cost of running the FSA program — recordkeeping, claim processing, and third-party administration fees.
Some employers spread forfeited amounts across all active FSA participants in the next plan year as a small increase to elected balances. Allowed but uncommon.
If the employer self-administers the plan or has already covered administrative costs, the money can simply be kept by the company. The IRS permits this.
The money cannot be returned directly to the individual who forfeited it. It cannot be rolled into a 401(k), HSA, or other personal account. It cannot become a tax deduction on your return.
Forfeiture is not just losing $300. It is losing $300 that was specifically pre-tax income. If your marginal federal rate is 22 percent, your state rate is 5 percent, and you also saved on FICA (7.65 percent), that $300 represented roughly $440 of gross earnings. And unlike a missed grocery deal, there is no recovery — the money is simply gone.
Neither is automatic. Your employer has to choose to offer one of them, and most plans use one or the other — not both, which is specifically prohibited.
See the full breakdown of grace period vs. carryover vs. runout to figure out which one your plan offers.
Use-it-or-lose-it is only a penalty for people who forget. A reminder set for mid-November gives you six weeks to schedule appointments, order eligible products, and use the balance you've already earned.
See the FSA spending reminder guide, or jump to how to spend FSA money before the deadline if your plan year ends in the next month.
Yes. Any unused balance above what your employer allows as a carryover is forfeited at the end of the plan year. This is the IRS use-it-or-lose-it rule, and there is no refund, no rollover to cash, and no tax deduction for the lost amount.
It goes back to your employer. Employers can use forfeited FSA balances to offset plan administration costs or redistribute the money across other employees in the plan — but the IRS prohibits returning it directly to the individual who forfeited.
The IRS did, based on the tax code that governs cafeteria plans (Section 125). Because FSA contributions are tax-free, the IRS originally required all unused funds to be forfeited so the accounts could not function as general tax-advantaged savings. Exceptions for carryovers and grace periods were added later.
Estimates from FSA Store and industry benefits surveys suggest roughly 40 percent of participants forfeit at least some portion of their contribution, with average forfeitures in the $170 to $340 range. Across all plans, the total runs into the hundreds of millions of dollars annually.
Two. A grace period of up to 2.5 months after the plan year ends, or a carryover of up to $660 for 2025 ($680 for 2026) into the next plan year. The IRS allows employers to offer one or the other, but not both, and some employers offer neither.
No. Health Savings Accounts (HSAs) are owned by the individual and roll over indefinitely. HSA balances belong to you even if you change jobs or insurance plans. Use-it-or-lose-it only applies to Flexible Spending Accounts, which are technically owned by the employer.
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