Here's What Happens When You Contribute Too Much to Your FSA

A flexible spending account (FSA) is a savings account that lets you set pretax dollars aside for healthcare expenses. Like some retirement accounts, FSA contributions are deducted from your income and do not count toward your overall tax bill. Funds must be used toward qualified medical expenses, and you can contribute up to $3,200 for 2024.

But there is a caveat: You must use your FSA contributions before an annual deadline or risk forfeiting your money. For example, if you contribute $2,000 for 2024, you should plan to spend as much of it as you can on medical expenses, or else risk losing some of that hard-earned cash you've saved.

The IRS is strict about this rule, but your employer could offer you a grace period. Let's take a look at what happens when you don't use your FSA and what you can do to avoid losing this money.

What happens if you overcontribute to your FSA?

FSAs have a "use it or lose it" policy. Any contributions you make expire by an annual deadline, usually the first of the next year. If you don't use this money before the year ends, it might ultimately end up in your employer's hands. More than likely, your employer will then use this extra money to pay administrative costs on FSA accounts.

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That said, some employers offer a grace period that will bump the annual deadline to a later month. For instance, if your annual deadline is Jan. 1, your employer may give you until mid-March to use up any remaining FSA money. Other employers will allow you to carry some money over into the next cycle. Carryover limits are set by the IRS and are typically no more than 20% of the maximum contribution. In 2024, the maximum amount you can carry over into 2025 is $640.

But there is one last hope for unused contributions: Your employer may pool them together and distribute them equally to employees who contributed for that year. In this way, you'll get a small piece of the pie, either as a fringe benefit or as a contribution match for FSA contributions made in the following year.

How to avoid forfeiting FSA money

Putting cash in a high-yield savings account might be a prudent option if your medical expenses are variable and you're not expecting any big hospital bills anytime soon. But if you're already contributing to your FSA, and you're worried you won't be able to spend it before the deadline, here are two ways to start draining it.

• Take a trip to the pharmacy. You may not realize just how many items you can buy with your FSA: bandages, heating pads, massage guns, alcohol wipes, sunscreen, and feminine products are just a few of the many things you can buy. If it comes down to the wire, go on a shopping spree before you forfeit your money.
• Try to prepay upcoming expenses. If you have ongoing treatments or prescriptions, you might be able to prepay for them.

An FSA is a great way to save money for medical expenses, but it's not right for everyone. For those who don't have many medical expenses, you might be better off with a high-yield savings or money market account. You'll earn interest on your savings, and you won't have to forfeit any money if you don't use it by an annual deadline.