A worker who set aside the full $3,300 in a health flexible spending account for 2025 and spent only $2,400 on medical bills lost $900 of pretax pay the moment the plan year closed, unless the employer offered a grace period or carryover. That is not a hypothetical. It is the math that roughly 14 million American families navigate every year, according to a U.S. Treasury participation estimate (though that figure dates to a 2013 proposed rule and has not been updated since).
Now, with the 2026 plan year underway for most calendar-year employers, the stakes are nearly identical. The IRS kept the health FSA contribution ceiling at $3,300 for 2025 and has not yet announced a change for 2026 at the time of this writing. The tax savings remain real, but so does the forfeiture risk. Here is how the use-or-lose rule actually works, what the current numbers look like, and how to make sure every dollar you set aside gets spent before the clock runs out.
Where the $3,300 limit comes from
The cap is not set by Congress each year. It is adjusted automatically for inflation under Section 125 of the Internal Revenue Code, using a formula anchored to a 2013 baseline. For the 2025 plan year, Revenue Procedure 2024-40 set the ceiling at $3,300, a $100 increase over 2024’s $3,200.
Because FSA contributions come out of your paycheck before federal income tax, Social Security tax, and in most states, state income tax, the savings compound. A worker in the 22 percent federal bracket who contributed the full $3,300 saved roughly $726 in federal income tax alone, plus additional payroll and state tax savings depending on location. But that benefit only materializes if the entire balance gets spent on qualifying expenses before the plan’s deadline.
The use-or-lose rule, explained
Federal rules leave little room for ambiguity: unused FSA balances are forfeited at the close of the plan year. Employers can soften the blow in one of two ways, but not both at the same time:
- Grace period: The plan extends the spending deadline by up to two and a half extra months after the plan year ends. For a calendar-year plan, that pushes the cutoff to March 15 of the following year. Workers whose employers offered this for the 2025 plan year had until March 15, 2026, to incur new eligible expenses against their remaining balance.
- Carryover: The plan lets participants roll a limited amount into the next year. For the 2025 plan year, the IRS set the maximum carryover at $660, also established by Revenue Procedure 2024-40 and restated in IRS Publication 969.
Your employer decides which option to offer, if either. Some plans include neither a grace period nor a carryover. Others cap the carryover below the $660 IRS maximum. The only way to know what applies to you is to read your plan’s summary plan description or ask your benefits administrator directly.
One detail that trips people up every year: a grace period is not the same as a run-out period. Many plans give participants 60 to 90 days after the plan year ends to submit claims for expenses that were incurred during the plan year. A grace period, by contrast, lets you incur new expenses after the plan year closes. Confusing the two can mean discovering too late that your money is already gone.
When dollars are forfeited, they stay inside the employer’s cafeteria plan. Employers can use forfeited funds to offset plan administration costs or reduce future contributions, but they cannot simply redirect the cash as corporate profit. For the worker, though, the result is the same: money deducted from your paycheck that you never get back.
What FSA dollars can actually cover
One of the most common reasons people forfeit money is underestimating how broadly FSA funds can be spent. Eligible expenses go well beyond doctor copays and prescriptions. Under IRS Publication 502, qualifying costs include:
- Dental work: cleanings, fillings, crowns, orthodontia
- Vision care: eye exams, prescription glasses, contact lenses, laser eye surgery
- Over-the-counter medications and menstrual products, no prescription required since the CARES Act of 2020
- Mental health services: therapy sessions, psychiatric care
- Medical devices: blood pressure monitors, crutches, hearing aids
- Sunscreen, first-aid supplies, and bandages
If you are sitting on a balance with your plan’s deadline approaching, scheduling a dental cleaning, ordering a new pair of prescription glasses, or stocking up on eligible OTC items are straightforward ways to use the funds before they vanish.
Nobody tracks how much money workers lose
Here is the uncomfortable reality: no federal agency publishes data on how much American workers forfeit each year. The Treasury’s 14-million-family participation estimate dates to 2013, and neither the IRS nor the Department of Labor releases aggregate forfeiture totals, average losses per participant, or breakdowns by income level.
That gap matters more than it might seem. Without reliable data, researchers cannot measure the real-world cost of the use-or-lose rule with any precision. It is also unclear how many employers have adopted the carryover option versus the grace period versus neither. Revenue Procedure 2024-40 sets the ceiling for carryovers but does not track employer adoption rates, and no centralized federal survey fills the void.
The higher contribution caps of recent years raise a question the available data cannot answer: are workers forfeiting more in dollar terms? If participants increased their elections to match the new ceiling but maintained prior spending patterns, the gap between contributions and actual medical expenses could have widened. That risk is directional rather than measurable, because participant-level data simply does not exist in any public form.
FSA vs. HSA: why the comparison keeps coming up
Workers who have access to a high-deductible health plan may also be eligible for a health savings account, which operates under fundamentally different rules. The most important distinction: HSA balances roll over indefinitely. There is no use-or-lose provision, no grace period needed, and no carryover cap. Unused funds stay in the account year after year and can be invested for long-term growth.
HSAs also belong to the individual, not the employer’s plan. If you leave your job, the HSA goes with you. An FSA, by contrast, generally ends when your employment ends, though COBRA continuation may be available in limited circumstances.
The trade-off is eligibility. You can only contribute to an HSA if you are enrolled in a qualifying high-deductible health plan and have no other disqualifying coverage. For the 2025 plan year, the IRS set HSA contribution limits at $4,300 for individual coverage and $8,550 for family coverage, with an additional $1,000 catch-up contribution for workers 55 and older. The IRS typically publishes the following year’s HSA limits in the spring or early summer; the 2026 figures may already be available by the time you read this. If your employer offers only a traditional PPO or HMO without a high-deductible option, an FSA may be your only pretax vehicle for out-of-pocket medical costs.
Strategies to avoid forfeiting your balance
The best defense against the use-or-lose rule is a realistic spending estimate before open enrollment. But even careful planners can end up with leftover funds. Here are several approaches that benefits professionals commonly recommend:
- Estimate conservatively. Start with last year’s out-of-pocket medical, dental, and vision costs. If nothing major is planned for the coming year, contribute at or slightly below that figure rather than maxing out the limit.
- Front-load predictable expenses. Schedule annual physicals, dental cleanings, and eye exams early in the plan year so you have a clearer picture of remaining funds by midyear.
- Check your balance quarterly. Most FSA administrators offer online portals or mobile apps. A quick check every few months prevents a December surprise.
- Know your plan’s deadline. If your employer offers a grace period, you may have until mid-March of the following year. If it offers a carryover, up to $660 (for the 2025 plan year) rolls forward. If it offers neither, December 31 is a hard stop.
- Stock up on eligible OTC items. Sunscreen, pain relievers, allergy medication, bandages, and menstrual products all qualify. Buying a year’s supply near the deadline is a simple way to zero out a small remaining balance.
- Watch for mid-year qualifying events. Getting married, having a baby, or experiencing another qualifying life event during the plan year may allow you to adjust your FSA election. That flexibility can help you avoid over-contributing if your circumstances change.
- Use FSA-eligible retailers. Several online stores specialize in FSA-eligible products and accept FSA debit cards directly, which simplifies last-minute spending.
How to plan your 2026 FSA election without repeating last year’s mistakes
If you are on a calendar-year plan, the 2026 plan year is already underway. That means the election you made during last fall’s open enrollment is locked in unless you experience a qualifying life event. Now is the time to pull up your FSA portal, check your current balance, and map out the medical, dental, and vision expenses you expect for the rest of the year.
Workers who switched jobs during 2025 should also take stock. FSA balances generally do not transfer between employers, so any unspent funds from a prior employer’s plan may already be gone unless a grace period or carryover applied.
Later in 2026, likely in October or November, the IRS will publish the inflation-adjusted FSA limits for the 2027 plan year. That announcement will set the new contribution cap and carryover maximum for the next open enrollment cycle. Until then, the numbers from Revenue Procedure 2024-40 remain the governing figures for the 2025 plan year, and any 2026 adjustments published since will apply to your current election.
For the millions of families relying on FSAs to soften the cost of medical care, the core tension has not changed. The tax break is genuine. The forfeiture risk is real. And the only reliable protection is knowing exactly what your plan allows and spending accordingly, well before the deadline arrives.
