March is crunch time for many Americans to “use or lose” unspent funds from last year’s medical flexible spending accounts (FSAs), as the grace period ends on some employer-sponsored plans.¹

Medical FSAs have been around for more than 40 years to help employees tackle out-of-pocket medical costs and reduce taxable income.² Plan participants can set aside pre-tax money to pay for expenses not covered by health insurance, including co-pays, deductibles, over-the-counter medications, and health and wellness products.³

Employees typically elect FSA payroll deductions during an annual open enrollment period for the coming year. The IRS allows individuals to contribute up to $3,300 in tax-free dollars for 2025 ($6,600 for couples), not including any contributions that employers choose to make.⁴

Predicting costs of medical visits 

Americans spent an average of $399 per month in 2024 on healthcare and medical costs, according to Empower Personal DashboardTM data. But it isn’t always easy to gauge FSA-eligible expenses, especially when trying to look forward.⁵  

About half of FSA holders end up forfeiting a portion of their contributions, according to a study of 3.2 million accounts by the Employee Benefit Research Institute. The average forfeiture in 2022, the latest year for published data, was $441.⁶

Only half of Americans find it easy to predict the cost of visiting a primary care provider. It’s often harder to gauge out-of-pocket costs for visiting specialists or undergoing procedures, especially due to rising costs and with the complexities of healthcare billing and insurance.⁷

About 47% of private workers and 72% of state and federal workers had access to employer-sponsored healthcare FSAs in 2024, according to the Labor Department.⁸

Fear of losing unspent funds is one of the top reasons why employees avoid signing up for medical FSAs. Some workers opt for health spending accounts, or HSAs, which have higher contribution limits and no spending deadlines. However, HSAs are only allowed for certain health insurance plans with high deductibles.⁹

Read more: What are the benefits of an HSA Account?

Some flexibility with an FSA 

Employers can offer FSA features to reduce unspent funds, including limited rollovers to the next year. The maximum carryover set by the IRS for tax year 2025 is $660, up from $640 in tax year 2024.¹⁰

Employers also can allow grace periods, usually 75 days, for employees to use all unspent FSA funds from a prior year. The deadline was March 15 to use all 2024 funds and the deadline to submit reimbursements is March 31.¹¹

Employers aren’t required to offer carryovers or grace periods — and they’re only allowed to offer one of those features. Even with such flexibility, billions in unspent medical FSA funds are forfeited each year.¹²

One estimate pegged the 2023 forfeitures at more than $4 billion. But it’s unclear how much of that loss was felt by actual account holders. For example, an employee who left behind a small amount of FSA funds would still come out ahead if the total tax benefits exceeded the forfeiture.¹³

Forfeited funds go to employers and can only be used for FSA expenses such as administration or reducing next year’s plan costs.¹⁴ Many employers have been improving education and outreach efforts to make sure that workers don’t leave money on the table.¹⁵ 

Nearly 40% of Americans admit to feeling overwhelmed when it comes to selecting benefits, according to Empower research.

How to spend FSA funds 

Employers aren’t the only ones urging FSA participants to spend those dollars. There’s been a noticeable uptick in direct marketing from major retailers such as Amazon, Walmart, Target, Walgreens, CVS, and others that accept FSA debit cards for payments.¹⁶

Many retailers have sites dedicated to eligible products. The inventories often contain thousands of products, from hearing aids and contact lenses to wearable fitness trackers and sleep masks. There are also cold and allergy medications, pain relievers, antibiotics, motion sickness pills, vitamins, and first-aid kits among the plethora of items.¹⁷ 

The IRS generally regards eligible medical FSA expenses as those used to treat, diagnose, or prevent a disease, but with certain conditions. For example, a gym membership might be an eligible FSA expense if it’s part of a doctor-prescribed plan to treat a disease or injury. Gym membership costs for general wellness wouldn’t be covered.¹⁸

Healthcare and human resources professionals have urged account holders to check with their FSA administrator or the IRS if they are uncertain about eligible expenses.¹⁹

There’s been an increase in online retailers that specialize in FSA spending, including some that offer to ease the process for getting a doctor’s note. The trend prompted an IRS warning on aggressive marketing last year.²⁰

Physician notes based on self-reported information — especially for items like healthy food or exercise costs — typically aren’t eligible expenses, the agency said.²¹ The IRS has a frequently asked questions page and other guidance to determine eligible food and wellness expenses.^22,23

Read more: Rx revamp: It’s easier than ever to get doorstep delivery of prescriptions