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The IRS use-or-lose rule and what it means for FSAs

Posted December 7, 2021

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The IRS’ use-or-lose rule governs flexible spending accounts (FSAs). This rule is one of the big differentiators between FSAs and other types of employee benefits. So what is the use-or-lose rule? And what does it mean for the upcoming plan year? We’ll answer those questions and more. 

What is the use-or-lose rule and how does it work? 

The IRS’ use-or-lose rule states that FSA funds must be spent  by the participant within the FSA’s plan year. That means FSA participants typically need to spend most or all of their FSA funds by the end of the plan year. Unused funds at the end of the plan year are forfeited to the plan. 

Can any funds carry over into next year? 

Possibly. The IRS normally allows up to a $550 carryover (adjusted annually, and increases to $570 for 2022) of medical FSA funds from one plan year to the next. Employers determine whether their medical FSAs include a carryover. 

The Consolidated Appropriations Act, 2021 also gives employers the ability to allow employees to carry over all unused FSA funds from plan years ending in 2021 to plan years ending in 2022. Employers are not required to provide this carryover to employees. 

Does use-or-lose apply to medical and dependent care FSAs?

Yes. The IRS’ use-or-lose rule applies to medical FSAs and dependent care FSAs

Does use-or-lose also apply to HSAs?

No. With a health savings account (HSA), all funds carry over from year to year. That’s one reason HSAs are “savings” accounts, while FSAs are “spending” accounts. 

Would you like to learn more about medical FSAs? Check out our Benefits Buzz episode for a breakdown of eight things you should know about them.

The information in this blog post is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own counsel.

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