The FSA use it or lose it rule is a catchy phrase coined by the Internal Revenue Service for its expirable Section 125 cafeteria plans. No, we are not talking about your middle school lunch. Employers select from various plans ("dishes") to include in the employee benefit package. One of those dishes is a the "use it or lose it" Flexible Spending Account.
FSA Use it or lose it Rule Explained
What is the Use it or lose it rule?
Unused FSA dollars are lost if not spent prior to the FSA deadline, hence the phrase: "use it or lose it". This rule is in place to encourage responsible planning for annual health expenses. Employers receive the unused funds (see What happens to my unused FSA funds?). However, the plans have loosened the "lose it" rule over the years and now offer extensions and grace periods to "use it."
FSA extensions explained
1. What is an FSA grace period?
An FSA grace period is a two-and-a-half-month extension to spend FSA funds after the official plan deadline. Every employer may select their own health plan year and deadline, so everyone's grace period may vary by company. In most cases, the grace period deadline falls on March 15h after the most popular official plan deadline across employers - December 31st.
2. FSA Carryover
The newest added exception to the FSA deadline — the "FSA Carryover." The FSA Carryover rule allows employees to carry over up to $570 unused FSA dollars into the next plan year. This dollar amount increases each year along with increasing FSA contribution limits. This added leniency complements the Flexible Spending namesake and is yet another example of loosening the use it or lose it rule.
3. FSA run-out period
An FSA run-out period is not an extension on spending, but additional time beyond the FSA deadline to file claims for expenses incurred the previous year. The claims process can be tedious at times and having the extra time makes using the accounts much easier. Most employers choose to extend run-out periods for up to 90 days, but it can vary.
4. Temporary COVID extensions
Employers could elect to suspend the FSA use it or lose it rule between 2020 to 2022. Eligible employees could carry over FSA funds all the way until 2022. Not every employer participated in this optional benefit and individuals should check with his or her HR department to be sure.
For an effortless way to spend unused FSA funds, shop BuyFSA.com with your FSA Card just like you would on any other store online (except all products are FSA-approved, guaranteed).