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A Health Flexible Spending Account (FSA) is a tax-advantaged account that allows workers to set aside pre-tax funds to cover qualified medical expenses. However, they are often used and lost, and unused balances are forfeited at the end of the plan year.
Roughly four in 10 workers at the Health Finance Agency will have unspent funds forfeited in 2024, according to an October report from the Employee Benefits Research Institute, a nonprofit research organization. The average forfeiture for these FSA account holders was $404, down from $436 in 2023. The study examined more than 3.3 million accounts representing $3.9 billion in donations.
But even workers who don’t zero out their balances may still benefit from using an FSA compared to using after-tax dollars to cover the same expenses.
“Even if someone returns FSA funds to their employer, if the amount forfeited is less than the tax savings realized, they may still be at an advantage compared to not participating in the FSA,” said Jake Spiegel, senior research fellow at EBRI and author of the study.
One-third of FSA holders face using it or losing it
According to the Bureau of Labor Statistics, nearly three-quarters (72%) of state and local government employees and 47% of private sector employees will have access to health FSAs in 2026. This compares to 68% and 40% respectively in 2017.
FSAs are different from health savings accounts (HSAs) that some people use in conjunction with high-deductible health plans. Both allow you to set aside pre-tax money for medical expenses, but HSAs also allow you to roll over and invest the balance from year to year.
About a third of FSA users in the EBRI database face strict “use it or lose it” clauses, Spiegel said. The remainder will either be allowed by the employer to carry forward up to $680 in 2026 to the next year, or given a grace period of up to 2.5 months after the deadline, subject to additional costs or forfeiture. However, employers cannot offer both options.
Rachel Rouleau, chief compliance officer at Health-Ecommerce, parent company of online retailer FSA Stores and HSA Stores, said many plans have a Dec. 31 deadline for disbursing FSA funds, but some employers have set deadlines for other times of the year.
“It is essential to understand the deadlines specific to these plans, so employees should check with their employer or FSA administrator to avoid forfeiture of unused funds,” Rouleau said.
Additionally, many employers give you additional time (usually three months after the deadline) to submit receipts for qualifying expenses incurred during the previous plan year.
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In 2026, the maximum contribution allowed to the Health Finance Agency is $3,400. In 2027, that amount will be $3,500, the IRS announced Thursday.
One reason workers may be disenfranchised is that they must decide how much to contribute to an FSA before the plan year begins.
“It’s hard to predict how much you’ll need to spend on health care, especially if you’re in good health and don’t have a chronic condition that makes prescription drug costs predictable,” Spiegel said.
Contributions to an FSA are deducted from your paycheck, generally avoiding federal taxes and the so-called payroll tax (known as FICA) that goes toward Social Security and Medicare. You may also be exempt from state and local taxes depending on where you live.
To determine how much you can save in taxes with an FSA, you can add up these tax rates and apply that total to your contributions, said Sean Robison, a certified financial planner and founder of Purpose Built Financial Services in Moorestown, New Jersey.
For example, let’s say your federal, FICA, state, and local taxes total 35% and you contributed $3,400, the maximum allowed in 2026. In this case, the estimated tax savings would be $1,190, which is “how much you can save by contributing to an FSA,” Lovison said.
This illustration assumes that the worker does not receive employer contributions to the FSA and that the tax rate is applied to the entire contribution.
As long as the amount forfeited from your FSA is less than (your tax savings), you will survive.
Sean Robison
Founder of Dedicated Financial Services
“As long as the number forfeited from the FSA is less than that number, you’re going to have an advantage,” Lovison said.
Of course, “we don’t want to run away from FSA money, but at the same time, from a mathematical perspective, we still have an advantage,” he said.
If you haven’t yet made a benefit election for next year, you can use this to help decide how much to contribute to your FSA in 2027 if you face forfeiture.
“Employees should review their expected medical expenses over the coming year and consider both their daily health habits and expected annual costs,” Rouleau said. “This includes regular prescriptions, doctor visits, copays, deductibles, dental and vision care, and other eligible out-of-pocket medical expenses for yourself and your eligible dependents.”
How to use “thousands” of unused balances
Before you give up on forfeiture, keep in mind that there are also many ways to spend the money on eligible expenses before the end of the year.
“From everyday medical necessities to eligible telehealth services, there are thousands of ways consumers can responsibly spend their FSA funds,” Rouleau said.
Additionally, “many consumers are surprised to learn that a wide range of over-the-counter medications, menstrual care products, sunscreen, first aid supplies, and certain health care devices are eligible for FSA,” Rouleau said.
The IRS says this is in addition to other medical services such as doctor and dentist visits, prescription drugs, acupuncture and addiction treatment.
If you’re not sure if you have money left in your FSA or need to spend it by the end of the year, most plans offer an online portal where you can check your balance, submit a claim, and check deadlines. Rouleau said FSA administrator information is typically located on the back of the FSA card.
