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Flexible spending accounts (FSAs) are handy ways to set aside pre-tax money for healthcare expenses like copays, prescriptions and dental work. But if you do not use the money you have set aside by the end of the plan year, you may lose it. This “use-it-or-lose-it” rule has left many employees wondering: if those funds are forfeited, can they be deducted from your taxes? The short answer is no.

Because FSA contributions are made with pre-tax dollars, they have already reduced your taxable income. That means once the funds expire unused, you cannot claim them as a deduction. Instead, the forfeited money goes back to your employer, and how it is used depends on the rules laid out in your company’s plan.

Why FSAs Don’t Work Like Savings Accounts

An FSA is not meant to store money for the long haul; it is a benefit designed to cover your annual out-of-pocket medical costs. The IRS created the use-it-or-lose-it rule specifically to keep these accounts from turning into tax shelters. If you do not spend the money within the benefit period, you risk losing it.

Still, the rule is not as harsh as it sounds. Employers may choose to give workers extra time to spend last year’s funds — until March 15 of the following year. Another option is to allow employees to roll over a limited amount, currently up to $660, into the next plan year. Not all companies adopt these options. Therefore, it is important to check your plan’s fine print.

What Happens to the Money Forfeited?

When funds go unused, they do not vanish into thin air. Instead, employers have several options, though strict IRS rules prevent them from simply returning forfeited balances based on what each person lost. The money cannot be donated to charity or used to claim a tax deduction either. Here is how it usually plays out.

One of the most common uses is covering administrative expenses for running the FSA program. As long as these costs are reasonable and properly documented, employers can use forfeited funds to keep the plan going without violating IRS rules.

Employers may also apply the money to reduce FSA fees in the following year. In practice, this can lower the costs employees face for participating in the program. Another option is adding to employee FSA coverage, effectively increasing how much workers can spend from their account, even beyond the IRS maximum, if the plan document allows it.

Finally, some employers choose to return the money directly to employees in cash. While this sounds appealing, it is not common because the refunds must be distributed fairly and are subject to payroll taxes. Tracking down former employees can also make this option more complicated than it seems.

How to Avoid Losing Your FSA Money?

The best way to avoid forfeiting funds is careful planning. When you enroll, estimate your medical costs for the coming year as closely as possible. Look at recurring expenses like prescriptions or routine care, and factor in any upcoming procedures you know about. Toward the end of the year, review your balance and schedule appointments or make eligible purchases before your funds expire.

It is also a good idea to ask your HR department about whether your plan offers a grace period or rollover option. A little clarity on the rules can save you from last-minute surprises.

Bottom Line

Unused FSA funds cannot be deducted from your taxes, since the money already gave you a tax break upfront. Once forfeited, those dollars return to your employer, who can use them within IRS guidelines for administrative costs, fee reductions, coverage boosts or, in rare cases, cash refunds.

The key takeaway is simple: FSAs are a valuable benefit if you plan your spending carefully. With a little attention to deadlines and plan rules, you can get the full value of your contributions and avoid the frustration of watching hard-earned money slip away.