Here’s What Happens if You Put Too Much Money in Your FSA

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Overfunding a flexible savings account (FSA) comes with some risks. Learn more about what happens when you don’t use your FSA money by the annual deadline. 

A flexible spending account (FSA) is a savings account that lets you save for health-related expenses, while also reducing your taxable income. Like 401(k)s and IRAs, the account is funded with pre-tax dollars, which could potentially put you in a lower tax bracket and help you cut your tax bill.

But there is a caveat: you must use your FSA contributions before an annual deadline or risk forfeiting your money. For example, if you contribute $3,050 for 2023 (the contribution limit for this year), you should plan to spend at least $3,050 on medical expenses. If you spend only $1,000 in 2023, then you might lose the remaining $2,050.

The IRS is very strict about this rule, but your employer may cut you a little break. Let’s take a look at what happens when you don’t use your FSA and what you can do to avoid losing this money.

What happens if you put too much money in your FSA?

FSAs have a “use it or lose it” policy. Any contributions you make expire by an annual deadline, usually Jan. 1. If you contribute more than you can reasonably use within a year, the money will ultimately return to your employer. More than likely, your employer will then use this extra money to pay administrative costs on FSA accounts.

That said, some employers offer a grace period that bumps the annual deadline to a later month. For instance, if your annual deadline is Jan. 1, your employer may give you until mid-March to drain your FSA money.

Other employers will allow you to “carryover” a portion of surplus funding from one year into the next. That can be a sigh of relief, but don’t get carried away: The IRS sets limits on how much you can carryover. For 2023, the maximum carryover amount is $610. So if you end 2023 with $1,500, you might still have to forfeit $890.

But there is one last hope for unused contributions: Your employer may pool them together and distribute them equally to employees who contributed for that year. In this way, you’ll get a small piece of the pie, either as a fringe benefit or as a contribution match for FSA contributions made in the following year.

How to avoid forfeiting FSA money

A high-yield savings account might be a better option if your medical bills are variable and you don’t have many health-related expenses. But if you’re contributing to your FSA right now, and you’re worried you won’t be able to spend it before the deadline, here’s what I would do:

Take a trip to the pharmacy. You may not realize just how many things you can buy with your FSA: bandages, heating pads, massage guns, alcohol wipes, sunscreen, and feminine products are just a few of the many things you can buy. If it comes down to it, go on a shopping spree before you forfeit your money. Try to prepay upcoming expenses. If you have ongoing treatments or prescriptions, you might be able to prepay for them.

An FSA is a great way to save money for medical expenses, but it’s not right for everyone. Even though the tax benefits are sweet, you’re taking a gamble if you contribute too much. For those who don’t have many medical expenses, you might be better off with a high-yield savings account. You’ll earn interest on your savings, and you won’t have to forfeit any money by an annual deadline.

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