Is FSA Use-It-or-Lose-It? Carryover, Grace Period, and Run-Out

By default, money left in your health care FSA at the end of the plan year is forfeited, but the FSA use it or lose it rule has two IRS-approved exceptions your employer may offer: a carryover of up to $680 into 2026, or a grace period of up to two and a half extra months to spend the balance.¹ Employers can offer one or the other, not both, and some offer neither. Check your Summary Plan Description before you assume anything survives December 31.

The Carryover Option

If your employer has adopted a carryover, a portion of your unused balance rolls into the next plan year instead of vanishing. For funds carrying into the 2026 plan year, the IRS ceiling is $680.¹ The cap adjusts for inflation each year; it was $660 for 2025 and $640 for 2024.²

A few things to know about how the carryover works in practice:

Your employer can set a lower cap than the federal maximum. If your plan limits carryover to $500, that is your binding limit.
Anything above the carryover cap is still forfeited. If you have $1,000 left and your plan allows the full $680, you lose the remaining $320.
The carryover does not eat into next year’s contribution limit. You can still elect the full annual maximum on top of what rolled over.³

The default is full forfeiture. Do not assume a carryover exists unless your plan documents say so in writing.

The Grace Period Option

Instead of a carryover, some employers offer a grace period of up to two and a half months after the plan year ends during which you can still incur new expenses against the prior-year balance. For a calendar-year plan, that means you have until March 15 to spend down whatever is left.⁴

The grace period does not cap the amount that survives. Your full remaining balance is available during those extra months. But once the grace period closes, every dollar still in the account is forfeited with no further exceptions.³

The expense has to be incurred inside the grace period, meaning the service actually has to be provided during that window. Paying a February bill for a procedure done the previous November does not count as a grace-period expense. That is a prior-year expense, and you would submit it through the run-out period instead.

Only One, Not Both

Federal rules prohibit an employer from offering a carryover and a grace period on the same FSA in the same plan year.⁵ Your plan will have one, the other, or neither. During open enrollment, look through your benefits materials to see which applies. If neither is mentioned, the full-forfeiture rule is in effect.

The two options protect balances differently. A grace period saves the entire remaining balance but only for a short window; if you cannot schedule enough medical care by March 15, the rest is gone. A carryover caps the protected amount at $680 but gives you the whole next plan year to spend it.

Spending Down a Balance Before the Deadline

If year-end is approaching and you still have money in the account, knowing what qualifies helps you avoid forfeiture. Health FSA-eligible expenses generally track the medical expense tax deduction rules in IRS Publication 502.³ Copays, prescriptions, dental work, eyeglasses, contact lenses, and medical equipment are the everyday categories.

Two categories often get overlooked:

Over-the-counter medications. Since January 1, 2020, OTC drugs such as pain relievers, allergy medicine, cold remedies, and first-aid supplies are eligible without a prescription. The CARES Act made this change and it applies to health FSAs, HSAs, and HRAs.
Menstrual care products. Tampons, pads, liners, cups, and similar items also became eligible under the same CARES Act provision.

Items used only for general wellness or cosmetic reasons, such as gym memberships, teeth whitening, or vitamins taken without a medical diagnosis, generally do not qualify.

The Run-Out Period for Filing Claims

The run-out period is a separate window after the plan year (or grace period) ends during which you can submit reimbursement paperwork for expenses you already incurred. It is not extra time to spend money. It is extra time to file for services already received before the deadline. Run-out periods typically last around 90 days, but your plan sets the exact length.

When you submit a claim during the run-out period, you generally need documentation showing the date of service, the provider, and the type of service. Many administrators require electronic submission or a postmark by the final day. Miss the deadline and the administrator denies the claim.

Where Forfeited Money Goes

Money left after every deadline passes does not disappear. It goes to your employer. Your employer cannot refund your individual forfeited balance directly back to you, because that would violate the prohibition on deferred compensation under Section 125.⁶

Under Treasury proposed regulations, employers have several options for the pooled forfeited funds:

Cover plan administration costs, such as claims processing and account maintenance.
Reduce future salary reduction amounts for all FSA participants in the following plan year.
Distribute the money to participants on a uniform per-capita basis as taxable cash.
Keep the funds as general employer revenue.

Any distribution back to participants must be spread evenly. Your employer cannot look at how much you personally forfeited and hand that same amount back.

If You Leave Your Job Mid-Year

When employment ends, whether you quit, are laid off, or are terminated, your ability to use the FSA generally ends the same day. Any remaining balance is forfeited unless you elect COBRA continuation coverage for the FSA.

COBRA generally applies to employers with 20 or more employees and lets you continue FSA coverage temporarily by paying the full contribution yourself, plus an administrative fee of up to 2%.⁷ COBRA for an FSA only makes financial sense if your remaining balance is bigger than what you would pay to keep it open. If you already spent more than you contributed, there is nothing left to protect.

One point in your favor: if you spent more FSA money than you contributed before leaving, your employer cannot claw back the difference.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Internal Revenue Service. Revenue Procedure 2024-40
3
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
4
Internal Revenue Service. Notice 2005-42 Section 125 Cafeteria Plans Modification of Application of Rule Prohibiting Deferred Compensation Under a Cafeteria Plan
5
HealthCare.gov. Using a Flexible Spending Account (FSA)
6
Office of the Law Revision Counsel. 26 U.S. Code 125 – Cafeteria Plans
7
U.S. Department of Labor. Continuation of Health Coverage (COBRA)