The FSA Use-It-or-Lose-It Rule

Unused health FSA money is forfeited when the plan year ends, unless your plan offers a carryover or a grace period. The proposed section 125 regulations call this the use-or-lose rule. It is a rule about the calendar.

The FSA deadline calculator turns a balance and a plan-year end into the amount at risk and the date it disappears. This page is the rule behind that number.

The rule as written

Prop. Treas. Reg. §1.125-5(c)(1) is three sentences long:

“Use-or-lose rule—(1) In general. An FSA may not defer compensation. No contribution or benefit from an FSA may be carried over to any subsequent plan year or period of coverage. See paragraph (k)(3) in this section for specific exceptions. Unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period, if applicable) are forfeited.”

The reason is structural rather than punitive. Section 125 excludes a cafeteria plan that provides deferred compensation, so money that survives its plan year would disqualify the benefit for everyone in the plan.

Where the forfeited money goes

The regulations call a forfeiture an experience gain and list what an employer may do with it. Under §1.125-5(o)(1), experience gains “may be … retained by the employer maintaining the cafeteria plan”, or, if not retained, used only to reduce the following year’s required salary reductions, to be returned to employees, or “to defray expenses to administer the cafeteria plan.”

Two limits sit on that list. Any allocation back to employees must be “on a reasonable and uniform basis”. And “in no case may the experience gains be allocated among employees based (directly or indirectly) on their individual claims experience”, so a plan cannot quietly refund your own forfeiture to you.

Notice 2013-71 closes the other exit: “A section 125 cafeteria plan is not permitted to allow unused amounts relating to a health FSA to be cashed out or converted to any other taxable or nontaxable benefit.”

The two doors out of forfeiture

A plan may offer a carryover or a grace period — not both¹. A carryover moves up to $680² into the next plan year for a plan year beginning in 2026. A grace period of up to 2½ months — the 15th day of the 3rd month after the plan year ends³ extends the time to incur new expenses instead. The comparison of the two sets out what each protects.

Neither is required. A plan with neither forfeits every unused dollar on the last day of the plan year.

The rule that runs the other way

Forfeiture is only half of the bargain. The uniform coverage rule at §1.125-5(d)(1) requires that “the maximum amount of reimbursement from a health FSA must be available at all times during the period of coverage (properly reduced as of any particular time for prior reimbursements for the same period of coverage).”

The same paragraph blocks the obvious employer response: “Employees’ salary reduction payments must not be accelerated based on employees’ incurred claims and reimbursements.” Publication 969 says the same thing from the employee’s side — you can receive the full election “at any time during the coverage period, regardless of the amount you have actually contributed.”

The regulation’s own example uses a $3,000 election funded at $250 a month. The participant incurs $2,500 of expenses in January and is reimbursed in full after one payment. That is the risk the employer carries in exchange for the forfeiture risk you carry.

The uniform coverage rule is health-FSA-only. Paragraph (d)(5) states that it “does not apply to FSAs for dependent care assistance or adoption assistance”, which is why a dependent care FSA reimburses only what you have already contributed.

Two deadlines, not one

The forfeiture date and the claim deadline are different dates. The plan year end is the last day to incur an expense. The run-out period, recorded here as Set by your plan — often 60–90 days after the plan year ends⁴, is the last day to send the receipt for an expense already incurred.

Missing either one forfeits the money, and the second is the one people miss. The run-out period explains where your plan’s date is written down.

What happens to unused FSA money?

It is forfeited at the end of the plan year, or at the end of a grace period where the plan has one. Prop. Treas. Reg. §1.125-5(c)(1) states that “unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period, if applicable) are forfeited.”

Can I get my FSA money back in cash?

No. Notice 2013-71 states that a cafeteria plan “is not permitted to allow unused amounts relating to a health FSA to be cashed out or converted to any other taxable or nontaxable benefit.” Publication 969 adds that an employer “isn’t permitted to refund any part of the balance to you.”

Where does forfeited FSA money go?

To the employer, which may keep it, use it to reduce next year’s salary reductions, return it to employees on a uniform basis, or spend it on plan administration. Prop. Treas. Reg. §1.125-5(o) lists those four options and forbids any allocation based on individual claims experience.

Do I owe money if I spend my whole election and then leave?

The uniform coverage rule requires the full election to be available from the start of the coverage period, and §1.125-5(d)(1) forbids accelerating your salary-reduction payments because of claims you have incurred. What happens at termination is set by your plan document, and leaving a job covers the rest of that sequence.

Does the use-it-or-lose-it rule apply to a dependent care FSA?

Yes. The rule in §1.125-5(c)(1) covers any FSA, and the carryover exception created by Notice 2013-71 is limited to health FSAs. A dependent care FSA may still have a grace period.

Does a carryover cancel the forfeiture?

Only up to its cap. For a plan year beginning in 2026 the maximum carryover is $680² against a salary-reduction limit of $3,400⁵, and Notice 2013-71 states that “any unused amount in excess” of the carryover “is forfeited.”

When exactly is the money gone?

At the end of the run-out period for that plan year, because that is when the unused amount is finally measured. Notice 2013-71 defines the amount carried over or forfeited as what is unused “after medical expenses have been reimbursed at the end of the plan’s run-out period for the plan year”.