A costly mistake to avoid: letting FSA funds go unclaimed

With gas, groceries and other essentials still expensive, few people can afford to leave money unclaimed.

That makes it a good moment to ask whether you’ve submitted receipts for eligible medical expenses and completed the paperwork needed to recover the money you set aside in a flexible spending account. Do you still have room to schedule an eye exam or replenish your first-aid supplies?

For some households, the amount left behind could even cover a grocery trip or two.

This is especially worth thinking about if you are deciding how much to contribute to an FSA during your employer’s open-enrollment period for the coming plan year. Those choices are often made before the new year begins.

Many workers never claim all they can, and the losses can be significant. Flexible spending accounts operate on a “use it or lose it” basis: if the money is not spent and claimed by the deadline, the employer keeps what remains.

About 40%, or roughly 4 in 10, account holders forfeited some of their FSA money in 2024, according to new research from the Employee Benefit Research Institute.

EBRI said the average forfeited amount was $404, down from $436 in 2023. That may not sound like much, but it is still real money.

For perspective, a family of four with two children in the age ranges 6 to 8 and 9 to 11 spends an average of $1,024 a month on groceries under the U.S. Department of Agriculture’s “thrifty plan,” or about $236.30 a week.

How much a family spends on food depends on household size, shopping habits, coupon use and where they live. Still, the point remains: $400 is not pocket change.

What a flexible spending account is

Employees can set aside up to $3,400 of pretax income in a medical flexible spending account for 2026. The maximum for 2027 is projected to be $3,500, though the Internal Revenue Service had not yet announced that figure as of Nov. 2.

FSA money can be used for qualifying out-of-pocket costs such as copays, prescriptions, prescription glasses, dental expenses and certain medical supplies not covered by insurance. Bandages and cough syrup can qualify, too.

As deadlines approach, consumers often see a wave of marketing reminders encouraging them to buy eligible items and use up remaining balances. FSA Store, for example, offers ready-made bundles for last-minute shoppers.

The company’s online FSA Funds Spender also lets shoppers enter their remaining balance and interests, then displays eligible products that match. That might include a heated massage gun for $199.99 or two packages of lavender-scented Epsom salt for $14.98.

According to Rachel Rouleau, chief compliance officer at Health-E Commerce, which operates the FSA Store, many high-tech health items, blood pressure monitors, selected skincare products and sun care items can also qualify.

Why people use an FSA

Why bother if you have to track receipts, file claims and meet strict deadlines?

The answer is taxes.

Money contributed to an FSA is taken from pay before payroll and income taxes are applied, which can create meaningful savings, especially for people in higher tax brackets.

Tax professional Mark Luscombe offered an example: an individual in the 22% federal bracket could save $748 in federal income taxes by contributing the full $3,400 to a health FSA in 2026. A married couple filing jointly in the same bracket and eligible for a combined $6,800 contribution could save $1,496.

In 2026, a single filer would fall into the 22% bracket with taxable income from $50,401 to $105,700. For joint filers, the range would be $100,801 to $211,400.

Luscombe, a principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois, said an individual could also save up to $260.10 in FICA payroll taxes. He noted, however, that lowering reported Social Security wages through FSA contributions could slightly reduce the earnings credited toward retirement benefits.

If a state income tax applies, there may be additional savings, he said.

Still, maximizing contributions is not always wise if you are unlikely to incur close to $3,400 in eligible health care expenses over the year.

“Forfeitures may result from estimated FSA expenses exceeding actual eligible expenses,” Luscombe said.

In other cases, account holders may simply forget about the balance until it is too late to spend it or file a claim. Others may misunderstand what counts as an eligible expense under the rules.

For instance, insurance premiums for medical, dental and vision coverage generally cannot be claimed through an FSA.

“Some taxpayers may be purposefully aggressive in estimating eligible FSA expenses to maximize the tax benefit, although incurring unnecessary expenses does not produce an equal amount of tax savings,” Luscombe said.

Deadlines can trip people up

Part of the confusion stems from the fact that FSAs do not work like health savings accounts. HSAs are different and do not require the same annual deadline for spending down the account.

Across all account holders, average contributions to health-related FSAs were $1,431 in 2024, up from $1,413 in 2023.

Most participants did use their money. EBRI said 89% took a distribution in 2024, up from 88% in 2023. Those who withdrew funds took an average of $1,503.

The report analyzed contributions, distributions and forfeitures using a database with more than 3.3 million accounts and over $3.9 billion in contributions.

According to the Bureau of Labor Statistics, 47% of private-sector employees have access to a health care FSA through their employer, while 72% of state and local government workers have access.

Plan ahead before the year ends

It is not easy to predict exactly how much you will spend on eligible medical expenses in a given year.

“Health care spending is lumpy from year to year,” said Jake Spiegel, senior research associate for health and wealth at EBRI.

He said younger workers, who typically have fewer medical expenses than older workers, are more likely to lose unused FSA funds to their employer.

About 66% of account holders younger than 25 forfeited some money, compared with 36% of those 65 and older. Older adults generally contribute more, and they also tend to forfeit larger dollar amounts on average.

Spiegel said the findings point to opportunities for employers to do a better job explaining eligible expenses, deadlines and the tools available to manage unused balances.

The study found that workers younger than 25 contributed an average of $623 to FSAs in 2024, compared with $1,639 among those ages 45 to 54.

Some experts recommend contributing a little less than your best estimate of annual eligible expenses so you are more likely to use everything you set aside.

The Internal Revenue Service determines which expenses qualify. Receipts from many grocery and drug stores often show items marked as FSA-eligible.

Expenses that may qualify include over-the-counter cold and flu remedies, sunscreen, first-aid supplies, doctor copays and prescription drugs.

The safest approach is to submit claims as soon as you incur eligible expenses rather than waiting until the end of the year. Review old receipts now and claim anything eligible before making a last-minute spending rush.

You do not need to wait until the end of the plan year to use FSA money, and you do not need to wait until enough payroll contributions have been made to cover a larger expense such as prescription glasses.

The full amount elected for the annual FSA contribution is generally available on the first day of the plan year.

If you are laid off during the year, employers cannot take the money back, and it does not become taxable income.

December is often the key deadline for using up qualifying expenses, but it is not universal. Some employers use different deadlines based on their own 12-month plan periods.

Spiegel said some FSAs allow a small rollover into the next plan year. If offered, the maximum rollover is $680 into 2027 from savings in 2026.

Other employers may offer a two-and-a-half-month grace period. If a plan year ends on Dec. 31, that can extend use of the money until mid-March.

Workers should contact their human resources department to confirm the rules for their specific plan.

Rouleau said consumers should review the details in the fall rather than waiting until late in the year to make sure they do not miss a deadline.

“A plan can have a carryover or a grace period but not both, and some have no extension at all, since extensions are up to the employer,” Rouleau said.

Missing the fine print can make it easy to lose money. Because deadlines vary so much from company to company, it pays to check.

“The fastest way to confirm your deadline is to ask your employer or plan administrator,” she said.

Taking a little time to understand the rules may uncover money you had forgotten about. That can be especially valuable when high prices continue to dominate everyday conversations.