An employee with $400 left in an FSA and only two weeks to use it faces a familiar December problem. At companies whose FSA plans allow limited or no carryover, employees can lose contributions made in January. The outcome follows a predictable process. The IRS use-it-or-lose-it rule has been in place since FSAs were introduced. Employers know the rule, and HR usually mentions it during open enrollment. Even so, employees allow balances to expire and raise complaints in January.
This is less a matter of employee carelessness than of ineffective timing. FSA year-end deadlines are often mentioned once in open enrollment materials, eight to ten weeks before the plan year closes, and employees do not retain the information. One October reference does not stop December forfeitures. Specific reminders delivered repeatedly in November and December can.
What the IRS rules permit and require
Under the central IRS rule in Section 125, FSA funds must pay for qualified expenses during the plan year or be forfeited. The plan sponsor, meaning the employer, does not take those funds as profit. Instead, forfeitures remain with the plan and may offset administrative expenses or, under some plan designs, return to participants in equal shares. The plan document determines the treatment.
IRS guidance allows a plan sponsor to place one of two relief provisions in the FSA plan document. Neither provision is mandatory. Many plans adopt one, while some adopt neither. Both cannot appear in the same plan.
One choice is a grace period, lasting up to 2.5 months after the plan year ends. During that window, participants may incur eligible expenses and charge them to the preceding year's FSA balance. With a December 31 plan year end, the period runs through March 15. January and February expenses may use the previous year's account balance, but any amount left after March 15 is forfeited.
The other choice is a carryover, which lets participants move up to a specified dollar amount of unused FSA funds into the next plan year. The IRS periodically changes the maximum. For plan years beginning in 2025, that maximum is $640. The carried amount is not necessarily available when the new plan year starts. Access typically begins after the prior year's claims run-out period ends. Funds above the limit are forfeited.
Why employees may not know their plan's provision
At most mid-size companies, the FSA terms appear in the SPD and are referenced in open enrollment materials. Employees who read both documents understand the provisions. Most employees do not review either one closely.
A common misunderstanding is treating an FSA like an HSA, with funds accumulating indefinitely. A December deadline message may not feel connected to a possible loss when an employee does not know a balance remains. Someone who began FSA payroll deductions in January and never tracked spending may be shocked in December to find $400 unused, with two weeks left to spend it or lose it.
Grace periods and carryovers create a second recurring misunderstanding. Employees who know one term may assume their plan has the other. The difference matters: a grace period requires expenses to be incurred by March 15, while a carryover places the funds in the new plan year without the same deadline pressure. An employee who mistakes a grace period for a carryover may wait through December and early January, miss the grace period deadline, and forfeit the balance.
Information a useful year-end message should contain
An effective year-end FSA message contains four specific details. A broad warning that "FSA deadlines are coming" rarely changes behavior. Employees need information they can use immediately.
First, identify the provision in your plan: a grace period through [date] or a carryover of up to $[amount]. Do not rely on employees to remember what they selected. Name the provision directly every year.
Second, explain how employees can view their current balance. Most FSA administrators offer a participant portal. Provide its URL and login steps instead of merely telling employees to log in. Mention a mobile app if the FSA administrator offers one. Employees who check their balance in December are much more likely to use it than those who receive a reminder without an easy way to confirm the amount.
Third, present the deadline in direct, plain language. "December 31 is the last day to submit claims for expenses incurred this plan year" is easier to understand than "claims run-out period ends December 31." Include the grace period end date when the plan has one. Employees should not have to work it out from the plan year end date.
Fourth, mention eligible expenses employees may overlook. Prescription eyeglasses, dental cleanings, contact lenses, physical therapy co-pays, and over-the-counter medications qualify as FSA-eligible. An employee with an expiring balance may choose to use it when reminded about an eligible purchase already planned. This does not mean urging employees to buy unneeded items. It means noting that expenses planned for January can be incurred earlier.
When to send messages for the greatest effect
Putting a single reminder in October enrollment materials is not enough. A late October or early November message may catch employees while they complete enrollment and consider next year's benefits, but it has limited impact on December deadline awareness. Once December arrives, open enrollment is no longer top of mind.
The most useful first message comes in mid-November, giving employees six weeks to make a plan. Send a shorter, more urgent follow-up during the first week of December. A final message in the last week of December can target people who have not submitted claims or whose balances remain high according to FSA administrator data. That last step is optional, but effective when the data is available.
The mid-November note can provide fuller explanations. December messages should be brief and direct, with the balance-check URL and exact deadline date. Employees who have used their balance need no further action. Those with money remaining need a clear reason to act promptly.
Run-out periods and claims filed after year end
HR should explain the claims run-out period separately from the grace period. Most FSA plans give participants time after the plan year ends, typically 90 days, to submit claims for expenses incurred during that year. An expense from December 31 may therefore be submitted in January, February, or March of the following year, provided it is filed before the run-out period closes.
A run-out period does not add time for incurring expenses. It adds only time for filing claims. An expense incurred on January 5 in the new plan year cannot be charged to the prior year's FSA balance during run-out unless the plan includes a grace period.
Employees often treat run-out and grace periods as the same thing. A clear HR explanation of the distinction, together with the provision included in your plan, prevents the most common complaints after the deadline.
How forfeited balances are handled
FSA forfeitures are not generally a major concern for employees who actively manage their accounts. People who monitor spending throughout the year and choose contributions based on known annual healthcare expenses rarely forfeit a meaningful amount. HR complaints usually come from employees who contributed too much during enrollment and then failed to watch the balance.
HR cannot stop employees from over-contributing at enrollment. It can make sure employees with substantial year-end balances receive enough advance notice and clear steps for using them. A November message, a December reminder, and an easy balance-check path can substantially reduce forfeitures. January complaints about lost funds almost always come from employees who lacked a specific reminder and did not check their balance until the deadline had passed.