A flexible spending account (FSA) is offered to employees by their employers to help offset medical costs using pre-tax dollars. FSAs are similar to the Health Savings (HSA) but only available to those employed by a company. Self-employed individuals only have access to HSAs.

With an FSA, employees typically contribute a set amount each paycheck from their gross pay and those contributions are tax-free, as long as the funds are used for qualified medical expense, as defined by the IRS (see publication 969).

Flexible spending accounts do expire and are considered to be a "use it or lose it" type of plan. They are savings accounts provided by employers to allow employees to defer portions of their salaries to be reimbursed for eligible expenses, such as medical or dependent care expenses. These deferrals are pretax, and as long as employees use the funds toward eligible expenses, the expenses are considered tax-free. As of 2019, the maximum salary reduction a person can put toward an FSA is $2,700.

In 2018, there were an estimated 33 to 38 million FSAs, according to the Employment Benefits Research Institute, and "according to WageWorks, roughly 8 percent of FSA owners leave on average $172 in their accounts at the end of a year," as reported by Marketplace on December 14, 2018.

Grace Period or Carryover

Any money deferred into an FSA during the calendar year is forfeited if it is not claimed by the expiration deadline. However, some plans may offer a grace period or carryover. A grace period is a certain amount of time in which the employee may submit a claim that may go past the end of the calendar year; the grace period tends to be around two to three months, so if it expires in January, you will need to spend those funds by mid-March. Unfortunately, once the grace period expires, all unused balances are forfeited.

Some FSA plans also offer a carryover, where plans may allow up to $500 of any unused balance to be used for the following year's expenses. The FSA plan specifies this limit, and it may be less than the maximum of $500.

Use Your Funds by Year's End

It is possible to be caught off guard by the clock on your FSA funds. The end of the year can be a great time to spend up your funds. But there are many options for using your funds, even at the last minute. Call your doctor's and set up any appointments that you put off, or get your teeth cleaned—both are typically covered by FSAs. Some FSA plans allow employees to purchase household medical supplies, like saline solution, Band-Aids, first aid kits, sunscreen, and travel sickness bands. Hundreds of items available at the online FSA Store.

The Bottom Line

It is important to understand specifically how your FSA works, as every plan is different. Each FSA may have a set expiration date, grace period or carryover, so review your plan documents or call your plan provider to get further clarification.