As of 2015, according to IRS regulations, the maximum amount of funds in a Flexible Spending Account (FSA) that can be carried over from one calendar year to the next is $500. Any amount of money in excess of the $500 carryover allowance left in an FSA at the end of the year is forfeited. Therefore, it is a good idea for employees with FSAs to check their account balances near the end of the year to make sure they do not leave funds in the account that are then lost at the beginning of the year.

What Is a Flexible Spending Account?

An FSA is a type of savings account that can be established as part of an employer's cafeteria plan of employee benefits. The employee selects an amount of money to be deducted from each paycheck and deposited into his FSA. Using an FSA is tax-advantageous because funds deposited in the FSA are pretax deferrals that are not subject to federal income tax or Social Security tax withholding, and are usually not subject to state income tax withholding either. Thus, the employee's total taxable income for the year is reduced by the total amount contributed to the FSA.

Contribution Limits and Carryover

As of 2015, the IRS allows a maximum yearly contribution to an FSA of $2,500 per individual. The minimum annual contribution amount an employee can designate in setting up an FSA is $100.

The carryover allowance of $500 is a recent policy change by the IRS, implemented in 2014. Prior to the policy change, employees could not carry over any amount of their remaining FSA funds from one year to the next. This policy discouraged many employees from establishing FSAs for fear of losing unused funds at the end of the year.

Expenses Eligible for Payment With FSA Funds

Employees with FSAs can use the funds in their accounts to pay for virtually any regular medical or dental expenses, such as prescription or over-the-counter medicines, dental expenses, eye exams and glasses, chiropractic treatments and psychological counseling. FSA funds are commonly used to supplement health insurance plans by paying deductibles or required co-pays with FSA money.