Something frightening could be hiding behind your health flexible spending account balance (FSA). As the year winds down, unused funds may be at risk of disappearing. But before the use-or-lose rule gives you a scare, let's unmask what it means and the options that could help you avoid a year-end surprise.

What’s Behind the Mask?

Health FSAs help employees pay eligible healthcare expenses with pre-tax dollars. According to IRS Publication 969, these accounts generally follow a “use-or-lose” rule: unused funds are forfeited by the end of the year unless an available plan provision allows otherwise.

Does Your Plan Offer Some Flexibility?

Employers may offer one of two options:

• Carryover: Allows a limited amount of unused funds to roll over into the next plan year, subject to IRS limits and plan terms.
• Grace period: Provides up to two months and 15 days after the plan year ends to incur eligible expenses using remaining funds.

For employees, the first step is reviewing their remaining balance and confirming which provisions, if any, their employer's plan offers. Plan-year deadlines, carryover limits, and grace periods can vary, making it important to understand the specific rules before scheduling expenses or submitting claims.

Don’t Let Deadlines Play Tricks

When it comes to health FSAs, timing matters. For calendar-year plans, December 31 is generally the deadline to incur eligible expenses unless the plan offers a grace period.

But don't confuse extra time to submit claims with extra time to incur expenses. As explained in IRS Notice 2013-71, a run-out period allows employees to submit claims for eligible expenses incurred during the applicable coverage period, even after that period has ended.

The real fright isn't the use-or-lose rule itself. It's discovering too late that your unused funds have disappeared. Check your plan's provisions and deadlines now to avoid an unwelcome year-end surprise.