Flexible Spending Accounts represent one of the most underutilized yet valuable employee benefits available in the American workplace. These pre-tax savings vehicles allow workers to set aside money for qualified medical and dependent care expenses, reducing their overall tax burden while covering essential costs.

The fundamental challenge with FSAs lies in their strict spending requirements. Unlike Health Savings Accounts, which allow unlimited rollover of unused funds, FSAs operate under federal regulations that traditionally required employees to use all contributed funds within the plan year or forfeit them entirely. This “use-or-lose” rule has evolved over time, with employers now having options to offer more flexibility.

What Is the Traditional Use-or-Lose Rule?

The original FSA regulations required employees to forfeit any unused funds at the end of the plan year. This strict policy was designed to prevent employees from accumulating large balances and using FSAs as long-term savings vehicles rather than annual expense management tools. The rule created anxiety among employees who struggled to estimate their exact healthcare and dependent care expenses for the upcoming year.

Many employees found themselves in December rushing to spend remaining FSA dollars on eligible items to avoid losing their contributions. This led to unnecessary purchases and inefficient use of healthcare dollars, prompting regulatory changes to provide more reasonable options for unused funds.

How Do Grace Period Options Work?

The grace period provision allows employers to extend the spending deadline by up to 2.5 months beyond the plan year end. If an employer offers this option, employees have until March 15th of the following year to spend any remaining FSA funds from the previous plan year. This extension applies only to funds remaining from the prior year and does not affect the new plan year’s contribution limits.

During the grace period, employees can use leftover funds for qualifying expenses incurred in the extended timeframe. Any unused amounts after the grace period expires are forfeited according to the original use-or-lose provisions. Employers must choose whether to offer this grace period option and communicate the decision clearly during open enrollment.

What Are FSA Rollover Provisions?

As an alternative to grace periods, employers may allow employees to roll over up to $640 of unused FSA funds into the following plan year. This rollover amount is adjusted periodically by the IRS to account for inflation and represents a significant improvement over the original use-or-lose requirements.

Rollover funds do not count against the new plan year’s contribution limits, effectively allowing employees to have access to both their rollover amount and their new annual contribution. However, employers cannot offer both grace periods and rollover options simultaneously - they must choose one approach for their FSA program.

How Should Employees Plan FSA Contributions?

Successful FSA management requires careful estimation of annual expenses and strategic planning throughout the year. Employees should review previous years’ healthcare and dependent care spending, consider anticipated changes in family circumstances, and account for routine expenses like prescription medications, dental work, and childcare costs.

Regular monitoring of FSA balances helps prevent year-end scrambles to spend remaining funds. Many FSA administrators provide online portals and mobile apps that allow employees to track their account balances, submit claims electronically, and receive alerts about upcoming deadlines.

Employees should also understand their specific plan’s rules regarding grace periods or rollover options, as these vary by employer. Some organizations provide detailed guidance about eligible expenses, while others offer decision-support tools to help employees optimize their contributions based on their individual circumstances.

Flexible Spending Accounts continue to provide valuable tax advantages for employees who understand and effectively navigate the use-or-lose rules and available options. Whether through grace periods or rollover provisions, the regulatory evolution has made FSAs more employee-friendly while maintaining their intended purpose as annual expense management tools. Proper planning, regular monitoring, and understanding of specific plan provisions enable employees to maximize their FSA benefits while minimizing the risk of forfeited contributions.