Money you don’t spend from your Flexible Spending Account by the end of the plan year is forfeited to your employer under the FSA use-it-or-lose-it rule. Two optional cushions can save some of that balance: a carryover of up to $680 into the next plan year, or a grace period of up to two and a half extra months to keep spending. Your employer picks one, the other, or neither, so the first thing to do is check your plan documents.
How the Deadline Actually Works
FSAs are authorized under Section 125 of the Internal Revenue Code, the cafeteria plan rules.1Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans You agree to reduce your paycheck by a set amount each pay period, the money goes into your FSA before taxes are calculated, and you draw on it for qualifying expenses during the plan year. In exchange for the tax break, the IRS imposes a firm boundary: whatever is left when the plan year closes goes back to your employer.
The plan year is a 12-month window, usually the calendar year, though employers can set a different start date. An expense counts only if the underlying service or care occurred inside that window. Buying supplies in January for a plan year that ended December 31 doesn’t work, even if your account still shows a balance. Your employer has no authority to waive this on your behalf.
For the 2026 plan year, the health FSA contribution ceiling is $3,400, with a $100 minimum election.2FSAFEDS. New 2026 Maximum Limit Updates
Carryover or Grace Period: The Two Cushions
The IRS lets employers build one of two relief provisions into a health FSA. A single plan cannot offer both for the same account.3Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
Carryover
Under IRS Notice 2013-71, your employer can let you roll unused health FSA dollars into the next plan year.4Internal Revenue Service. IRS Notice 2013-71 – Modification of Use-or-Lose Rule For Health Flexible Spending Arrangements For 2026, the carryover ceiling is $680.2FSAFEDS. New 2026 Maximum Limit Updates Employers can set a lower cap or skip the carryover entirely. The rolled-over amount does not count against next year’s contribution limit, so a $680 carryover into 2027 sits on top of whatever you elect for that year.3Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans Anything above the cap is still forfeited.
Grace Period
The alternative is a grace period of up to two and a half months after the plan year ends.5Internal Revenue Service. IRS Notice 2005-42 – Modification of Application of Rule Prohibiting Deferred Compensation Under a Section 125 Cafeteria Plan During that window, new qualifying expenses can be paid from last year’s leftover balance. A calendar-year plan with a full grace period runs through March 15. Anything unspent when the grace period closes is forfeited.
If your plan offers neither cushion, the plan-year deadline is the only deadline you have.
The Run-Out Period Is Not the Grace Period
These two get mixed up constantly. The grace period gives you more time to incur expenses. The run-out period gives you more time to file claims for expenses you already incurred.
Most plans allow 90 days or more after the coverage period ends to submit documentation for services that already happened. New expenses don’t count during the run-out period; you’re simply catching up on paperwork. A dental cleaning you had in November but never submitted a receipt for is exactly what the run-out period is for. Claims usually require an itemized receipt showing the date of service, the provider’s name, and a description of the service, submitted through your administrator’s portal. When the run-out period closes, any remaining balance is gone for good.
Where the Forfeited Money Goes
Once your balance is forfeited, it becomes your employer’s property. Employers are not allowed to return the money directly to the person who lost it, because that would turn the FSA into a savings account and break the tax-advantaged structure the IRS requires.6FSAFEDS. What Is the Use or Lose Rule? The IRS does not dictate exactly how employers must use forfeited amounts. Common approaches include offsetting the administrative costs of running the plan, reducing future employee contributions across the board, or spreading the amounts back to all participants as a uniform credit. Whatever the employer does has to satisfy nondiscrimination rules, so favored employees cannot be steered extra money and allocations cannot be tied to individual claims history.
What Happens If You Leave Your Job
Your ability to incur new FSA-eligible expenses ends the day your employment ends. You have to be an active employee at the time of service for a claim to qualify. Your employer may still give you a run-out period to file paperwork for expenses that happened while you were employed.
Here the math depends on which side of the uniform coverage rule you land on. For health FSAs, your entire annual election is available on the first day of the plan year, no matter how little you’ve actually contributed through payroll.7U.S. Department of the Treasury. Section 125 Proposed Treasury Regulations Suppose you elected $3,400 for the year, spent $2,800 by March, then resigned after only $850 had been deducted from your paychecks. Your employer cannot claw back the difference. Flip the numbers: if you had contributed $850 but only spent $200, the remaining $650 is forfeited. Leaving early with a large unspent balance rarely works out in your favor.
Health FSAs are treated as group health plans, so COBRA continuation coverage can be available after a qualifying event like job loss. Electing COBRA for an FSA usually only pencils out if you’ve contributed more than you’ve spent, because you’d be paying the full premium (your contribution amount plus up to 2% for administrative costs) just to reach the remaining balance. That’s why FSA COBRA elections are uncommon.
How to Spend Down Before the Deadline
The best defense against forfeiture is knowing what qualifies. The IRS uses Publication 502 as the baseline for eligible medical expenses, and FSA rules are slightly more generous in a few spots.8Internal Revenue Service. Publication 502 – Medical and Dental Expenses Reimbursable items typically include:
- Doctor visit co-payments, deductibles, and lab fees
- Any prescription medication
- Dental care: cleanings, fillings, crowns, orthodontics, and dentures
- Vision care: eye exams, prescription glasses, and contact lenses
- Over-the-counter medications, including pain relievers, allergy medications, and menstrual care products, which have qualified without a prescription since the CARES Act in 2020
The OTC expansion is one place FSA rules diverge from the standard medical expense deduction. Publication 502 still requires a prescription for most drugs to count as a deductible medical expense but notes that the restriction does not apply to FSA reimbursement.8Internal Revenue Service. Publication 502 – Medical and Dental Expenses Stocking up on eligible OTC items is one of the simplest year-end moves if you’re staring at a leftover balance.
Dependent Care FSAs Work Differently
Dependent care FSAs run under a separate set of rules in Section 129. For 2026, the household contribution limit is $7,500, or $3,750 if you’re married and filing separately.9Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs That’s a significant jump from the $5,000 cap in place since 1986, effective for tax years beginning on or after January 1, 2026.
Two features matter for forfeiture planning. First, the uniform coverage rule does not apply. You can only be reimbursed up to what has actually been deposited through payroll deductions so far. If you enroll a child in summer camp in June with only $2,000 contributed by then, your reimbursement is capped at $2,000 until more paychecks come through. Second, qualifying expenses must be work-related, meaning they let you or your spouse work or look for work. Daycare, preschool, before- and after-school programs, elder care for dependents who live with you, and summer day camps all qualify. Overnight camps do not.10Internal Revenue Service. Publication 503 – Child and Dependent Care Expenses
The same use-it-or-lose-it discipline governs dependent care balances, so plan your contribution schedule around when you expect the biggest bills to hit.