Health flexible spending accounts suffer from a structural flaw that most workplace benefits do not: the use-it-or-lose-it provision. Unspent balances, in many plans, revert to the employer at year-end. Yet the data suggest investors and employees consistently misprice this risk — and often abandon a tax-advantaged instrument that still works in their favor even when imperfectly used.
The numbers are instructive. Roughly 40% of health FSA accountholders forfeited unused funds in 2024, according to the Employee Benefit Research Institute’s analysis of more than 3.3 million accounts representing $3.9 billion in contributions. The average forfeiture was $404, down from $436 in 2023. On the surface, that looks like money destroyed. Run the arithmetic properly and the picture changes: an employee who contributed $2,000, spent $1,600, and forfeited $400 still avoided federal income and payroll taxes on the full $2,000 contribution. At a combined marginal rate of 30%, that is $600 in tax savings against a $400 loss — a net positive of $200. As EBRI’s Jake Spiegel noted, forfeitures only leave a participant worse off than non-participation when the forfeited amount exceeds realized tax savings.
From my years running corporate balance sheets, I can confirm the other side of this transaction: forfeited FSA dollars are not pure profit for employers. They must be recycled into plan administration, cafeteria plan improvements, or similar uses. The employee should treat forfeitures as a planning input, not a reason to opt out.
Access is expanding; discipline has not kept pace
Seventy-two percent of state and local government workers and 47% of private-sector workers have access to a health FSA in 2026, per Bureau of Labor Statistics data — up from 68% and 40% in 2017. Participation and enrollment discipline, however, have not improved proportionally. The core problem is structural: employees must elect a full year’s contribution before the plan year begins, with no ability to adjust for unforeseen medical events mid-year. Forecasting health spending is genuinely difficult, particularly for healthy individuals without predictable prescription costs.
Distinguish FSAs from health savings accounts before allocating capital to either. HSAs permit unlimited rollover and investment — they function as a supplemental retirement vehicle. FSAs do not. Roughly a third of FSA users in the EBRI database face a strict use-it-or-lose-it provision. The remainder benefit from one of two relief mechanisms, and employers may offer only one, never both: a carryover of up to $680 into 2026, or a grace period of up to 2.5 months after year-end to incur eligible expenses.
Quantify the benefit before you enroll
The 2026 contribution cap is $3,400; the IRS has set 2027 at $3,500. Contributions avoid federal income tax, FICA taxes supporting Social Security and Medicare, and, in many jurisdictions, state and local taxes. The calculation for your personal benefit is straightforward: sum your applicable marginal rates and apply that percentage to your contribution. At a combined 35% — federal, FICA, state, local — a maximum $3,400 contribution yields approximately $1,190 in tax savings. That figure becomes your forfeiture threshold. Any unused balance below $1,190 leaves you ahead; anything above it does not. The math assumes no employer contribution and that the marginal rate applies to the full amount, but it is a reliable planning benchmark.
Apply the result prospectively. If you forfeited $400 this year under a 35% combined rate, you have roughly $790 of cushion — but you should still recalibrate. A forfeiture is the most direct data point you have on your own spending forecast error, and it should inform your 2027 election if you have not already locked in benefits.
Run down the balance deliberately
Before accepting any forfeiture, treat the balance as a spendable asset with a hard deadline. Eligible expenses extend well beyond doctor visits and prescriptions: over-the-counter medications, menstrual care products, sunscreen, first-aid supplies, certain health-monitoring devices, telehealth services, dental and vision care, acupuncture, and addiction treatment all qualify under IRS rules. Pull forward planned purchases — replacement eyeglasses, dental work scheduled for January, a season’s worth of prescription copays — into the current plan year where sensible.
Administrative diligence matters as much as the spending itself. Confirm your plan’s actual deadline; while Dec. 31 is common, some employers operate on off-cycle plan years. Verify your balance through your plan’s online portal, and remember that most plans allow roughly three months after the deadline to submit receipts for expenses already incurred during the plan year. That receipt-submission window is where a meaningful share of avoidable forfeitures actually occurs — not from unspent money, but from undocumented spending.
The disciplined approach: check your balance quarterly, not annually. Reconcile receipts as expenses occur. Elect conservatively, erring toward the carryover or grace-period option if your employer offers either. An FSA is not an investment vehicle, but at a 30–35% immediate, guaranteed return on every dollar contributed, it remains one of the highest-yield decisions available to a working household — provided you manage the deadline like the liability it is.
