If you have a flexible spending account (FSA) through your employer, you may be wondering if you can use leftover funds to pay medical bills from the previous year. Unfortunately, the general rule is that FSA dollars can only be used for expenses incurred within the current plan year.
However, there are a couple potential exceptions that may allow you to pay some prior year medical costs with your FSA. In this comprehensive guide, we’ll explain the FSA “use it or lose it” rule, look at the exceptions, and offer tips maximizing your FSA.
The FSA “Use It or Lose It” Rule
FSAs are governed by the IRS and subject to the “use it or lose it” rule. This means the funds in your FSA must be used by the end of the plan year for expenses incurred during that period.
If you don’t use all the money in your FSA by the deadline, those leftover funds are forfeited. Your employer gets to keep the forfeited funds to help cover administrative costs.
The FSA plan year typically aligns with the calendar year from January 1st to December 31st. However, some employers may use a different 12 month period like July to June.
Why the “Use It or Lose It” Rule Exists
The use it or lose it rule prevents FSAs from acting as a long-term savings account. According to IRS regulations, FSA funds can only be used to reimburse yourself for out-of-pocket medical expenses in the current plan year.
This rule ensures that FSA tax benefits are realized. Since your contributions are deducted pre-tax from your paycheck, the IRS doesn’t want funds sitting in the account indefinitely.
The 2 Exceptions to the FSA Use It or Lose It Rule
While you typically can’t use FSA dollars for prior year expenses, there are 2 potential exceptions
1. FSA Grace Period
Your employer may offer a grace period of up to 2.5 months after the plan year ends to use your remaining FSA balance. For example, if your FSA year is January to December, you may have until March 15th to incur claims.
Any eligible expenses during the grace period can be reimbursed from the previous year’s balance. Check if your plan includes this grace period exception.
2. FSA Carryover
As of 2020, employers may allow up to $570 of unused FSA funds to be carried over into the next plan year. You can then use this carryover money to pay for expenses incurred in the following year.
So if you had $500 left in your 2021 FSA, your employer could let you carry that over to use in 2022 in addition to the new contributions for 2022. Check if your employer has implemented FSA carryover.
Claiming Orthodontia Expenses
One exception to the plan year rule is orthodontia payments. If you’re reimbursing ongoing orthodontia treatment, you can use your current FSA balance even if the treatment began prior to the current plan year.
For example, if you started braces in June 2021 which continued into 2022, you could use your 2022 FSA to reimburse yourself for orthodontist payments made in 2022. This provides some flexibility.
Tips to Maximize Your FSA
To avoid forfeiting hard-earned money, implement these tips to maximize your FSA each year:
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Carefully calculate your expected medical expenses for the coming year when deciding how much to contribute to your FSA. You want to contribute enough to cover costs but not too much.
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Save all medical receipts and documentation in case you need to submit for reimbursement at the end of the plan year.
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Check your FSA balance and deadlines regularly so you know how much you have left to spend.
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If available, take advantage of the FSA grace period or carryover to use leftover funds.
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For ongoing expenses like orthodontia, try timing your payments so they occur after your new FSA plan year starts.
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If you risk forfeiting funds at the end of the plan year, stock up on eligible healthcare items you may need like contact lenses, prescriptions glasses, etc.
With proper planning, you can avoid losing your hard-earned FSA contributions. While you typically can’t use FSA for prior year medical bills, exceptions like the grace period and carryover provide some flexibility. Check with your employer’s FSA policy if you have any questions.
Can I use FSA to pay off old medical bills?
FAQ
Can FSA funds be used for previous year expenses?
Can I use my FSA to pay old medical bills?
Is FSA based on date of service or payment?
Can I use my 2024 FSA to pay for 2023 expenses?
Can I use my FSA to pay bills from prior years?
New comments cannot be posted and votes cannot be cast. No, you can’t use this year’s FSA to pay bills from prior years. I wouldn’t call it trouble, but you’ll be taxed on the amount you’ve spent on prior year bills. No. The FSA year and the medical expense service date must match, i.e. only 2022’s FSA can pay for expenses incurred in 2022.
When can I use my FSA funds?
Let’s dive into the details: 1.**Health Care FSA**: With this type of FSA, you can use the funds to cover various healthcare expenses, including: – Insurance deductibles – Medical devices – Prescription
Can I use my health care FSA to pay medical expenses?
Yes, the FSA does not require that your dependents be covered under your health insurance plan. You can use your account to pay for eligible health care expenses for your family, regardless of the health insurance plan in which they are enrolled. 4. Can I use my Health Care FSA to reimburse outstanding medical expenses from the prior year?
Do I need a health care FSA?
A health care FSA can be useful for people with any level of health costs. If you have predictable, ongoing medical expenses during the year, or regular over-the-counter spending, using pretax dollars for those costs lowers your bottom line. Dependent care FSAs are useful if you’re paying for care for a child or dependent adult while you work.