Do you have a Flexible Spending Account (FSA) you use to pay health care or dependent care expenses? Typically, you have to empty the account before the end of the year or forfeit any remaining funds. But your employer may provide one of two ways to avoid this “use-it-or-lose-it” rule.

How they work

Generally, you can contribute to an FSA on a pretax basis through regular withholding of pay. As a result, you save both income taxes and payroll taxes. In addition, your employer saves on its share of payroll taxes. An FSA can be set up for health care or dependent care expenses, as follows:

Health care. This type of account generally may be used to pay for expenses that would qualify as deductible medical expenses, such as doctor and dentist visits and prescription drugs. The annual contribution limit of $2,500 is inflation-indexed to $3,050 for 2023.



Dependent care. The funds in this type of account may be used to pay qualified expenses associated with caring for under-age-13 children or dependents who are physically or mentally incapable of self-care. Dependent care FSA funds can be used to cover costs for day care centers, nursery schools, babysitters and summer day camp (but not overnight camp). The annual limit for contributions, which isn’t indexed for inflation, is $5,000.

With either type of FSA, if you make withdrawals from the account to pay for qualified expenses, the distributions are exempt from tax.

What has changed

In the past, you had to forfeit all the funds remaining in your account at year end — with no exceptions. This was often difficult to manage due to the unpredictable nature of health care and dependent care expenses. But the use-it-or-lose-it rule has been relaxed. Employers now may offer one of two choices to FSA participants:

1. Grace period. An employer can provide participating employees with a 2½-month grace period. In other words, employees have until March 15, 2024, for the 2023 plan year to use any remaining funds in an FSA. If an amount still remains after the grace period ends, it’s forfeited.
2. Carryover of funds. Alternatively, an employer may allow FSA participants to carry over up to $500 of unused funds to the next year. This amount is indexed to $610 in 2023. Accordingly, any amount above the $610 limit is forfeited. For example, if you had $1,000 left in the account, you would lose $390.

It’s important to note that employers can offer the grace period or the carryover. But they can’t offer both options.

Take full advantage

Size up your personal situation to make sure you take full advantage of either the grace period or carryover if your employer allows it. Otherwise, do your best to drain your account before January 1. For example, you might schedule a dental cleaning or physical exam in December that can be paid for with FSA dollars.