Can You Carry Over FSA Money? A Comprehensive Guide

The short answer is: yes, potentially, but with limitations. Whether you can carry over your Flexible Spending Account (FSA) funds depends heavily on your employer’s specific plan rules. It’s not an automatic feature, and understanding the nuances is crucial to avoid losing your hard-earned dollars.

Understanding the Carryover Rule

The carryover rule, a provision established by the IRS, allows employers to permit participants to carry over a certain amount of unused FSA funds from one plan year to the next. Think of it as a safety net, preventing a complete “use-it-or-lose-it” scenario that often leads to panicked spending at the end of the year. However, several critical details govern this:

• Employer Discretion: The most important point is that the carryover option is not mandatory. Employers are not required to offer it. They have the freedom to choose whether or not to include it in their FSA plan.
• Maximum Carryover Amount: The IRS sets a limit on the amount you can carry over. As of 2024, this limit is $610. So, even if you have more than $610 remaining in your FSA, you can only carry over up to that amount. Amounts exceeding this limit are still subject to the “use-it-or-lose-it” rule.
• Plan-Specific Rules: Even if your employer offers the carryover option, there might be further internal rules. For example, some employers may only allow carryover for certain types of FSAs, like healthcare FSAs, but not dependent care FSAs. Read your plan documents carefully.

The Alternative: The Grace Period

Before the carryover rule existed, the only way to avoid losing FSA funds was through a grace period. This allowed participants an additional 2.5 months after the end of the plan year to incur eligible expenses and submit claims against their previous year’s FSA balance.

• Mutually Exclusive: It’s important to understand that the carryover rule and the grace period are mutually exclusive. An employer can offer one or the other, but not both. If your employer offers a grace period, you will not be able to carry over any unused funds.
• Understanding the Timing: If you are under a grace period, you have 2.5 months from the end of the plan year to incur expenses. Ensure to submit the claims before the deadline set by your FSA plan administrator.

Why Knowing Matters

Understanding whether your FSA plan allows for carryover or offers a grace period is paramount for effective planning. Without this knowledge, you risk:

• Losing Money: Misjudging your spending habits and overestimating your eligible expenses can lead to unused funds disappearing at the end of the plan year.
• Suboptimal Planning: Knowing your options allows you to make informed decisions about how much to contribute to your FSA each year. You can contribute more aggressively if you know you have a carryover safety net.
• Last-Minute Scrambles: Without a clear understanding, you may find yourself scrambling to spend remaining funds on potentially unnecessary items or services just to avoid losing them.

Checking Your FSA Plan Details

The most reliable way to determine whether your FSA allows for carryover is to consult your Summary Plan Document (SPD). This document outlines the specific rules and regulations of your FSA plan. You can usually find it on your employer’s benefits portal or by contacting your HR department. Look for sections related to “carryover,” “grace period,” or “unspent funds.”

FAQs: Navigating the Nuances of FSA Carryover

1. What happens to unused FSA funds if my employer doesn’t offer a carryover or grace period?

If neither a carryover nor a grace period is offered, the “use-it-or-lose-it” rule applies strictly. Any funds remaining in your FSA account at the end of the plan year (or grace period, if applicable) will be forfeited.

2. Can I carry over funds from a dependent care FSA?

Generally, carryover is more common with healthcare FSAs than with dependent care FSAs. While theoretically possible, many employers do not offer carryover for dependent care FSAs due to regulatory complexities. Always check your plan documents.

3. If I change jobs, what happens to my FSA funds?

Generally, when you leave a job, your FSA coverage ends. You may be able to continue your coverage under COBRA, but this usually involves paying the full cost of the premiums. Unused funds are typically forfeited unless you elect COBRA continuation.

4. How does the carryover affect my contribution limit for the next year?

The carryover does not affect your contribution limit for the subsequent year. You can still contribute the maximum allowable amount for the new plan year, regardless of how much you carried over. For example, you can contribute the maximum FSA amount even if you’re carrying over the $610 limit.

5. What expenses are eligible for reimbursement with carried-over funds?

The same rules apply to carried-over funds as to funds contributed during the plan year. You can use them for eligible healthcare expenses as defined by your FSA plan. This typically includes medical, dental, and vision expenses, as well as eligible over-the-counter medications with a prescription (if required by your plan).

6. Can I use carried-over funds to pay for expenses incurred in the previous plan year?

No. Carried-over funds can only be used for eligible expenses incurred during the current plan year. They cannot be used to retroactively reimburse expenses from the previous plan year.

7. How do I know how much money I have left in my FSA?

You can typically check your FSA balance through an online portal provided by your FSA administrator or through a mobile app. You can also contact your FSA administrator directly for information about your balance.

8. Are there any tax implications for carrying over FSA funds?

No, carrying over FSA funds does not create any additional tax implications. The funds were already contributed on a pre-tax basis, and carrying them over simply extends the period in which you can use them for eligible expenses.

9. What happens if I don’t use the carried-over funds in the next plan year?

If you don’t use the carried-over funds by the end of the subsequent plan year, they will be forfeited. The “use-it-or-lose-it” rule still applies to carried-over funds, they just give you an extra year to spend them.

10. My employer offers a “run-out” period. What is that?

A “run-out period” is a specific timeframe after the end of the plan year (or grace period, if applicable) during which you can submit claims for expenses incurred during that plan year. The run-out period does not extend the period in which you can incur expenses, it only extends the period in which you can submit your documentation to receive reimbursement.

11. How does the carryover rule interact with Health Savings Accounts (HSAs)?

You generally cannot contribute to an HSA if you are also covered by a general-purpose healthcare FSA. However, you can contribute to an HSA if you have a limited-purpose FSA (which only covers dental and vision expenses) or a post-deductible FSA. If your employer offers a carryover option for a general-purpose FSA, you will be ineligible to contribute to an HSA until the carried-over funds are depleted.

12. Is it possible for the carryover amount to change from year to year?

Yes, it is possible. While the IRS sets the maximum carryover amount, employers can choose to offer a lower carryover limit than the maximum. Also, the IRS adjusts the maximum carryover limit annually, so it can change from year to year. Always refer to your plan documents for the most up-to-date information.

Conclusion

Navigating the world of FSAs can feel like a complex dance of rules and regulations. But armed with the right information and a thorough understanding of your employer’s plan, you can confidently manage your healthcare expenses and avoid the dreaded “use-it-or-lose-it” scenario. Remember to consult your Summary Plan Document (SPD) and reach out to your HR department or FSA administrator with any specific questions. With careful planning and informed decision-making, you can maximize the benefits of your FSA and keep more money in your pocket.