FSA Refund Rules: Claims, Forfeiture, and Appeals

FSA reimbursement rules work like this: you pay out of pocket for an eligible medical or dependent care expense, send your plan administrator proof of what you spent, and receive the money back tax-free from your account. Claims need itemized documentation, most plans pay by direct deposit or debit card, and any balance you don’t spend by the plan’s deadline is generally forfeited under the IRS “use-it-or-lose-it” rule.¹ The details that matter most, such as deadlines, carryover amounts, and appeal windows, are set in your specific plan documents within limits the IRS defines.

What Counts as an Eligible Expense

A Health FSA can reimburse most costs that would qualify as a medical or dental expense deduction under the tax code. That covers doctor visits, hospital copays, prescription drugs, dental work, vision care, physical therapy, and mental health treatment.² Since the CARES Act took effect in 2020, over-the-counter medications and menstrual care products are also eligible without a prescription.³

The expense has to treat, diagnose, or prevent a specific condition. General wellness spending usually doesn’t qualify. A gym membership is only reimbursable if a physician prescribed it to treat a diagnosed condition such as obesity or heart disease. Nutritional counseling follows the same logic: eligible when it addresses a specific diagnosis, not when it is general healthy-eating advice.⁴

How to Submit a Claim

Most plans accept claims through an online portal or mobile app, and paper forms are still available. Whichever route you use, every claim needs documentation showing three things: the date of service, who provided the service, and what the expense was for. An itemized receipt or an Explanation of Benefits from your insurance carrier meets that standard.⁵ A credit card statement or canceled check does not, because neither one describes the service.

Once approved, reimbursement arrives by direct deposit or check, depending on what you chose at enrollment. Many Health FSAs also issue a debit card that pays the provider directly at checkout, which skips the reimbursement wait. That convenience comes with a catch. Even after a debit card transaction clears, the plan administrator may still ask for documentation confirming the purchase was eligible. Ignoring that request will typically get your card suspended until you produce the receipt or repay the amount.

When You Get Paid Back and How Much

Health FSAs run on a “uniform coverage” rule: your full annual election is available on the first day of the plan year, even though payroll deductions have only funded a fraction of it. That means you can front-load a big expense in January and keep contributing for the rest of the year.² For 2026, the maximum Health FSA salary reduction is $3,400, and your employer can set a lower cap.⁶

Dependent Care FSAs work differently. Reimbursement is capped at whatever you have actually contributed at the time of the claim. If you elected $7,500 for the year but only $2,000 has been withheld when you submit, you get $2,000 and wait on the rest as more payroll deductions come in.⁷

What Happens to Unspent Money

The default rule is strict. Any balance left in your Health FSA at the end of the plan year is forfeited.¹ You don’t get a refund. Your employer keeps the money. This is the tradeoff for the tax break: the anti-deferral rules in Section 125 of the tax code prohibit rolling FSA money forward indefinitely.⁸

Employers can soften that outcome by adopting one of two exceptions. They cannot offer both for the same FSA, and if they choose neither, the strict forfeiture stands.

Grace Period

A grace period gives you an extra two months and fifteen days after the plan year ends to keep spending the previous year’s balance on new expenses.¹ For a calendar-year plan, that runs through March 15. Anything unspent after that is forfeited.

Carryover

The carryover rolls part of your unused balance into the following plan year. For plan years beginning in 2026, the IRS caps the carryover at $680, and your employer can set a lower ceiling.⁶ Anything above that limit is still forfeited. The rolled amount sits on top of your new election, so you effectively have more spending room in the new year.

Between the two, carryover is usually the safer option for people who can’t predict their medical spending. A grace period pushes you to spend fast at the start of the new year. A carryover gives you twelve months to use the rolled funds.

Fixing an Ineligible Reimbursement

Getting paid for something that turns out not to qualify is more common than people expect, especially with debit cards, where the purchase clears before anyone reviews it. The IRS lays out a correction sequence employers must follow:

The debit card is deactivated, and you file future claims manually until the problem is resolved.
The employer asks you to repay the ineligible amount directly.
If you don’t repay voluntarily, the employer can withhold the amount from your paycheck to the extent allowed by law.
If a balance still remains, the employer deducts it from your next approved reimbursement. Owe $200 from a bad charge and submit a valid $250 claim, and you receive $50.
Only after exhausting those steps can the employer write off the amount as a business debt.

The employer can apply the middle three steps in any order, but has to apply them the same way to all participants.⁹ If an ineligible reimbursement is never repaid or offset, it becomes taxable income, and you may receive a Form 1099 reporting it.

Appealing a Denied Claim

If your plan administrator denies a claim, you have the right to appeal. Federal regulations require group health plans to give you at least 180 days from the denial notice to file that appeal.¹⁰ The denial notice itself must explain why the claim was rejected and identify what additional information could reverse the decision. The appeal must be reviewed by someone independent from the person who denied the claim initially.

Most denials come down to documentation problems rather than ineligible expenses. If you submitted a credit card receipt instead of an itemized statement, resubmitting the right paperwork usually resolves it. For genuinely contested eligibility questions, include a letter from your provider explaining the medical necessity of the expense. Your plan documents will spell out the specific appeal steps.

Reimbursement After You Leave the Job

Your ability to incur new Health FSA expenses generally ends on your last day of employment or the date your coverage terminates, whichever your plan specifies. After that, you enter the plan’s run-out period, a window of roughly 30 to 90 days for submitting claims on expenses you already incurred while employed. The run-out period is for paperwork only. It does not extend the dates you can actually receive care.

The uniform coverage rule creates a useful wrinkle here. If you elected $3,400 for the year but quit in March after contributing only $850, you can still claim up to $3,400 in expenses incurred before your termination date. The employer absorbs the difference and cannot recover it from you.

Any balance you have not claimed is forfeited at termination unless you elect COBRA continuation coverage for the FSA.¹ COBRA lets you keep the FSA active by paying the full cost yourself, plus an administrative fee of up to 2%.¹¹ You generally have 60 days from the qualifying event or the date you receive the COBRA notice, whichever is later, to elect. In practice, COBRA for an FSA only makes sense if you’ve contributed more than you’ve spent and have upcoming expenses that would use the remaining balance.

Dependent Care FSA Reimbursement Differences

If you have a Dependent Care FSA, a few reimbursement rules diverge from the Health FSA version and are worth knowing before you assume anything carries over. Reimbursement is limited to what you have actually contributed at the time of each claim, as noted above. The grace period is available if your employer offers it, but the carryover provision is not; the IRS has never extended carryover to dependent care accounts.¹ Whatever you don’t spend by the end of the plan year or grace period is forfeited.

At tax time, you also need to report your dependent care provider’s name, address, and taxpayer identification number on Form 2441. For an individual, that’s a Social Security number; for an organization, it’s an Employer Identification Number. Tax-exempt providers such as churches or schools are exempt from the TIN requirement.¹²

Outside of open enrollment, you can only change your FSA election, health or dependent care, if you experience a qualifying life event. Common ones include marriage, divorce, birth or adoption of a child, a spouse gaining or losing employer coverage, and a change in employment status affecting benefit eligibility. Dependent Care FSAs also allow changes when the care provider or its cost changes significantly. Each change has to be consistent with the event. Having a baby lets you increase your election; it does not let you drop your Health FSA entirely.

1
Internal Revenue Service. Modification of Use-or-Lose Rule For Health Flexible Spending Arrangements and Clarification Regarding 2013-2014 Non-Calendar Year Salary Reduction Elections Under Section 125 Cafeteria Plans, Notice 2013-71
2
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
3
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act
4
Internal Revenue Service. Frequently Asked Questions About Medical Expenses Related to Nutrition, Wellness and General Health
5
Internal Revenue Service. Claims Substantiation for Payment or Reimbursement of Medical and Dependent Care Expenses
6
Internal Revenue Service. Revenue Procedure 2025-32
7
Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs
8
Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans
9
Internal Revenue Service. Correction Procedures For Improper Health Flexible Spending Arrangement Payments
10
eCFR. 29 CFR 2560.503-1 – Claims Procedure
11
U.S. Department of Labor. Continuation of Health Coverage (COBRA)
12
Internal Revenue Service. Publication 503 (2025), Child and Dependent Care Expenses