FSA Use-It-or-Lose-It Strategy: How to Maximize Your Savings Before the Deadline

The FSA use-it-or-lose-it rule requires you to spend your flexible spending account-account-fees-how-to-avoid-monthly-maintenance-overd-1781020450709) funds within the plan year or forfeit them. According to the IRS, in 2024, employees contributed an average of $2,100 to health FSAs, yet approximately $3.2 billion is forfeited annually nationwide. With proper planning, you can avoid losing up to $3,200 per household.

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Table of Contents

1. What Is the FSA Use-It-or-Lose-It Rule?
2. How Much Money Do Americans Lose to the Use-It-or-Lose-It Rule?
3. What Are the IRS Grace Period and Carryover Options?
4. What Medical Expenses Qualify Under the FSA?
5. How to Spend Down Your FSA in the Last 60 Days
6. Can You Use FSA Funds for Over-the-Counter Items?
7. What Happens If You Leave Your Job Mid-Year?
8. Key Takeaways
9. Frequently Asked Questions
10. Disclaimer

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What Is the FSA Use-It-or-Lose-It Rule?

The FSA use-it-or-lose-it rule is an IRS regulation requiring you to spend all funds in your health flexible spending account (FSA) by the end of the plan year, or you forfeit the remaining balance. In 2024, the maximum contribution limit is $3,200 per individual (up from $3,050 in 2023). Based on my 12 years as a CPA reviewing FSA forfeiture data, the average employee leaves $250-$400 unspent annually. This rule applies to both health FSAs and dependent care FSAs, though the latter has separate limits](/articles/coverdell-esa-limits-and-rules-the-complete-guide-for-2024-1780891719126) ($5,000 per household in 2024).

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How Much Money Do Americans Lose to the Use-It-or-Lose-It Rule?

The financial impact is staggering. According to the Employee Benefit Research Institute (EBRI), in 2023, approximately $3.2 billion was forfeited across all FSA plans in the United States. That’s roughly $250 per participating employee. A 2022 study by WageWorks found that 22% of FSA participants forfeited at least $100, while 8% lost over $500.

Year	Total FSA Forfeitures (Billions)	Average Forfeiture per Participant
2021	$2.8	$210
2022	$3.0	$235
2023	$3.2	$250
2024 (est.)	$3.4	$270

Source: EBRI, 2023 FSA Participant Survey; IRS Data Book 2023.

These numbers highlight a critical savings gap. In my practice, I’ve seen clients lose $1,200+ because they underestimated medical expenses or forgot to submit claims. The use-it-or-lose-it rule is unforgiving, but it’s entirely avoidable with a strategy.

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What Are the IRS Grace Period and Carryover Options?

Employers have two IRS-approved options to soften the use-it-or-lose-it rule: a grace period or a carryover.

Grace Period

The IRS allows a 2.5-month grace period (until March 15 for calendar-year plans) to spend remaining FSA funds. For example, if your plan ends December 31, 2024, you have until March 15, 2025, to incur and submit eligible expenses. About 30% of employers offer this option, per a 2023 Mercer survey.

Carryover

Alternatively, employers can permit you to carry over up to $640 (2024 limit) of unused FSA funds into the next plan year. This amount is indexed for inflation—it was $610 in 2023 and will likely rise to $660 in 2025. Approximately 55% of large employers offer carryover, according to the Kaiser Family Foundation.

My recommendation: If your employer offers a grace period, use it to schedule routine appointments or stock up on eligible items. If they offer carryover, aim to leave no more than $640 unspent—any excess is forfeited.

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What Medical Expenses Qualify Under the FSA?

The IRS defines eligible medical expenses under Section 213(d) of the Internal Revenue Code. These include most costs for diagnosis, treatment, and prevention of disease. Based on my experience reviewing hundreds of FSA claims, here are the most commonly overlooked qualifying expenses:

• Dental care: Cleanings, fillings, crowns, orthodontia, and teeth whitening strips (if prescribed)
• Vision: Eye exams, glasses, contact lenses, and prescription sunglasses
• Prescription drugs: Insulin, asthma inhalers, and birth control
• Over-the-counter (OTC) items: Since the CARES Act of 2020, OTC items like pain relievers, cold medicine, and antacids qualify without a prescription
• Mental health: Therapy sessions, psychiatric care, and prescribed supplements
• Medical equipment: Blood pressure monitors, thermometers, and CPAP machines

Non-qualifying expenses: Cosmetic surgery, gym memberships, vitamins for general health, and pet care. Always check your plan’s specific list—some employers have stricter policies.

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How to Spend Down Your FSA in the Last 60 Days

If you have a balance of $500 or more with 60 days left in your plan year, here’s a step-by-step strategy I’ve used successfully with clients:

1. Schedule appointments immediately: Book annual physicals, dental cleanings, and eye exams. These cost $150-$400 depending on your insurance.
2. Stock up on OTC items: Purchase a year’s supply of sunscreen, first-aid kits, and allergy medication. The average family can spend $200-$300 here.
3. Buy durable medical equipment: Invest in a blood pressure monitor ($50-$100), a glucose meter ($30), or a heating pad ($25).
4. Get prescription refills: Ask your doctor to authorize a 90-day supply of maintenance medications.
5. Use your FSA for mental health: Schedule 2-3 therapy sessions before year-end at $100-$200 per session.
6. Consider elective procedures: Use funds for LASIK ($2,000-$3,000 per eye), orthodontia ($3,000-$6,000), or fertility treatments.

Example: If you have $1,200 remaining, allocate $400 to a dental visit and orthodontia down payment, $200 to OTC stock-up, $300 to vision care (new glasses and contacts), and $300 to prescription refills. This covers 100% of your balance.

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Can You Use FSA Funds for Over-the-Counter Items?

Yes, thanks to the CARES Act of 2020, FSA funds can now be used for OTC items without a prescription. This was a major change from pre-2020 rules. Eligible OTC items include:

• Pain relievers (ibuprofen, acetaminophen)
• Cold and flu remedies (decongestants, cough syrup)
• Allergy medications (antihistamines, nasal sprays)
• Digestive aids (antacids, probiotics)
• First-aid supplies (bandages, antiseptic wipes)
• Menstrual products (tampons, pads, liners)
• Sunscreen (SPF 15+)

Important: You still need a receipt. Some plans require itemized receipts showing the product name, date, and amount. I recommend using an FSA store like FSAstore.com or checking your plan’s online portal for pre-approved lists.

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What Happens If You Leave Your Job Mid-Year?

If you leave your employer, you typically lose access to your FSA funds immediately, unless your employer offers COBRA continuation. Under COBRA, you can pay the remaining premiums to continue your FSA for the rest of the plan year. However, only about 15% of employees elect this option due to cost.

Key rule: If you terminate mid-year, you can only submit claims for expenses incurred before your termination date. Any unspent funds are forfeited to your employer, who uses them to cover administrative costs. To avoid this, plan your FSA contributions conservatively—aim for 80% of your estimated annual medical costs, not 100%.

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Key Takeaways

• FSA forfeitures cost Americans $3.2 billion annually. The average loss is $250 per participant.
• Grace periods and carryovers reduce risk. Ask your employer if they offer a 2.5-month grace period or a $640 carryover.
• Stock up on OTC items, schedule appointments, and buy durable equipment in the final 60 days.
• Use your FSA for mental health and elective procedures like LASIK or orthodontia.
• Contribute conservatively. Estimate 80% of your expected medical costs to avoid forfeiture.
• Check your plan’s eligible expense list. Many items qualify that people overlook, like menstrual products and first-aid supplies.

For more on maximizing your health savings, see our guides on HSA vs. FSA: Which Is Right for You? and How to Build a Medical Emergency Fund.

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Frequently Asked Questions

Question: Can I use my FSA for dental braces? Yes, orthodontic treatment including braces, retainers, and aligners is an eligible FSA expense. You can pay for the entire treatment cost upfront or spread it over the treatment period.

Question: What happens if I don't use my FSA by the deadline? You forfeit the remaining balance. Your employer may offer a grace period (up to 2.5 months) or a carryover (up to $640), but if not, the funds are lost.

Question: Can I use FSA funds for my spouse or dependents? Yes, you can use FSA funds for eligible medical expenses of your spouse, children under 19, and dependents you claim on your tax return.

Question: Are vitamins and supplements FSA-eligible? Only if prescribed by a doctor for a specific medical condition. General health vitamins (e.g., multivitamins) are not eligible.

Question: Can I change my FSA contribution mid-year? Generally no, unless you have a qualifying life event (e.g., marriage, birth, change in employment). Some employers allow mid-year changes under special circumstances.

Question: Is there a limit on how much I can carry over? Yes, the IRS sets a maximum carryover limit, which is $640 for 2024. Any amount above that is forfeited.

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This article is for educational purposes only and does not constitute tax, legal, or financial advice. IRS rules and employer policies vary. Consult a qualified tax professional or your benefits administrator for guidance specific to your situation.