Can I Deduct a Forfeited FSA?

A flexible spending account lets you use pretax money to pay for certain health care expenses. With many plans, if you don’t use this money by the end of the year, you have basically forfeited FSA funds to the IRS.

Tip

Since FSAs are funded with pretax money, unused amounts are not tax-deductible.

Flexible Spending Account Deductibility

Because FSA funds are not taxed, they are not deductible if you don’t use them. What happens to the unused money? Your employer can usually keep it, but the money must go toward maintaining its FSA program. The employer always assumes some risk for an employee’s FSA. That’s because even though an employee contributes a certain amount toward the FSA in each pay period, they can access all of the yearly contribution beforehand. Should the employee leave the employer before fully funding the account, the employer has to absorb the loss.

FSA Rules

FSAs are use it or lose it accounts. If you don’t use your FSA funds by the end of the calendar year, they are forfeited. However, some plans may provide a grace period of up to 2.5 months, in which the employee may pay qualified medical expenses incurred during that time from the previous year’s FSA balance. A plan may also permit employees to use up to $500 left in their previous year’s FSA to pay for qualified medical expenses during the following year. However, if you had more than $500 left over in your FSA at the end of year, that amount is forfeited.

Qualified medical expenses are specified in each plan, but do not include nonprescription drugs. They also don’t include amounts covered under your health insurance plan, or health insurance or long-term care premiums. These medical expenses may be incurred not only by the employee, but also by their spouse and any dependents claimed on their income tax return. Employees may also enroll in a dependent care FSA to pay for certain expenses for children under 13 or a relative living with them who is mentally or physically unable to care for themselves. Dependent care eligible expenses include daycare, summer camp, preschool, babysitting or nanny costs or before and after school care. As with a medical FSA, dependent care FSA unused money is forfeited if not used within the calendar year.

2018 FSA Limits

The 2018 FSA contribution limits are $2,650. For a dependent care FSA, an employee may contribute up to $2,500 annually if married and filing a separate tax return, or $5,000 if filing as single, head of household or married filing jointly. A married couple cannot claim a total in excess of $5,000 between them.

2017 FSA Limits

For 2017, the contribution limit for an FSA is $2,600. The dependent care FSA contribution limits are the same as for 2018.

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About the Author

A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Financial Advisor, Sapling, nj.com and The Nest.


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