The health FSA and its use it or lose it rule

How it works

At open enrollment the worker elects a yearly amount up to this year's official health fsa limit (not yet verified here; see the official source below), and payroll takes it out before income, Social Security, and Medicare tax. The full elected amount is available on the first day of the plan year, even though it is paid in over twelve months, so a January surgery can be paid from a full year's election. Eligible costs include copays, deductibles, prescriptions, glasses, dental work, and many over the counter items. Money not spent by the end of the plan year is forfeited, though an employer may offer one of two softeners: a grace period of up to two and a half months, or a carryover of a capped amount into the next year, never both. A health FSA generally cannot be held alongside a health savings account unless it is limited to dental and vision.

What it gives

The savings include payroll tax, which makes each dollar worth more than a deduction.

The whole election is available on day one, which acts like an interest free advance for a big bill in January.

Many everyday items such as sunscreen and bandages count.

What it costs, or where the catch is

Unspent money beyond any grace period or carryover is lost to the employer.

A general health FSA blocks contributions to a health savings account for the same months.

Leaving the job mid year usually ends access to the account, though the money already spent stays spent.

A worked example

Simon elects $2,400 for the year, which is $200 a month from his paycheck. At a 22 percent rate plus 7.65 percent payroll tax, the election saves about $2,400 times 0.2965, or $712. In March he has a $1,500 dental crown, which the account covers in full even though only $600 has been deducted so far. By December he has spent $2,250, and his plan's carryover catches the last $150.

Where it goes wrong

The common miss is electing based on a hopeful guess, spending little, and forfeiting several hundred dollars at year end.

Who confirms it for you

For your own numbers, the plan administrator or HR. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Publication 969, Health Savings Accounts and Other Tax Favored Health Plans. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.