When managing healthcare expenses, a health Flexible Spending Account (FSA) can be a valuable tool, allowing individuals to set aside pre-tax income for eligible medical costs. However, a crucial aspect to understand is how unused funds are handled at the end of the plan year. The Internal Revenue Service (IRS) generally enforces a 'use-it-or-lose-it' rule, meaning any remaining balance might be forfeited. Fortunately, employers can offer options like a rollover or a grace period to mitigate this.
For the 2026 plan year, employers have the discretion to permit a rollover of up to $680 in unused health FSA funds into the subsequent year. Alternatively, a plan might provide a grace period of up to 2.5 months following the plan year's end, allowing participants extra time to utilize their remaining balance. It's important to note that employers are not obligated to provide either of these options and cannot offer both for the same health FSA. The amount rolled over does not reduce the contribution limit for the new plan year. These rollover provisions can extend for multiple years, contingent on the employer’s plan terms and the prevailing carryover limits.
There are significant distinctions between FSAs and Health Savings Accounts (HSAs). FSAs are exclusively employer-sponsored, rendering them inaccessible to the unemployed or self-employed. In contrast, HSAs are individually owned accounts available through qualified financial institutions to those meeting specific eligibility criteria. While both can receive employer contributions, FSAs are not portable upon leaving a job, unlike HSAs, which remain accessible to the individual. Contribution limits also vary: the 2026 health FSA limit is $3,400, whereas HSA limits are $4,400 for self-only coverage and $8,750 for family coverage. Eligibility for HSAs typically requires enrollment in a high-deductible health plan (HDHP), which for 2026 generally means a deductible of at least $1,700 for self-only or $3,400 for family coverage, with annual out-of-pocket expenses not exceeding $8,500 for self-only or $17,000 for family coverage. Conversely, participation in a health FSA does not necessitate an HDHP.
Navigating the rules of your FSA, particularly regarding rollovers, grace periods, and run-out periods, is essential as the plan year concludes. Any funds not used or carried over by the specified deadlines risk forfeiture. By understanding these mechanisms, individuals can maximize their healthcare savings and minimize financial loss.
