Strategies for a successful retirement

Millions of American workers risk losing money in their health Flexible Spending Accounts (FSAs) each year because of a rule requiring them to spend most or all of their contributions before a specified deadline. However, new research suggests that even employees who forfeit unused funds may still benefit financially from participating in these tax-advantaged accounts. More importantly, managing healthcare expenses through an FSA could help workers protect more of their income for retirement savings and other long-term financial goals.

According to an October report from the Employee Benefit Research Institute (EBRI), approximately four in 10 health FSA holders forfeited unused balances in 2024. Among those who lost money, the average amount forfeited was $404, down from $436 in 2023. The research examined more than 3.3 million accounts representing approximately $3.9 billion in contributions.

Health FSAs allow employees to set aside money from their paychecks before taxes to cover eligible medical expenses. Because contributions generally avoid federal income and payroll taxes, workers can reduce their overall healthcare costs. However, unlike traditional savings accounts, unused funds may be forfeited at the end of the plan year.

Despite this limitation, financial experts say participating in an FSA can still be worthwhile. Jake Spiegel, a senior research associate at EBRI, explained that workers may come out ahead when their tax savings exceed the amount of money they ultimately lose.

For example, someone contributing $3,400 to an FSA in 2026 who faces a combined federal, state, local and payroll tax rate of 35% could save approximately $1,190 in taxes. If that employee forfeits $404, the estimated tax savings would still exceed the lost balance, leaving them financially better off than if they had paid for the same healthcare expenses using after-tax income.

The maximum permitted FSA contribution is $3,400 for 2026 and will increase to $3,500 in 2027, according to the Internal Revenue Service (IRS).

How FSAs Can Support Retirement Planning

Although FSAs are designed primarily to cover current healthcare expenses, they can also play an indirect role in retirement planning. Healthcare costs are among the expenses retirees need to prepare for, particularly as medical needs generally increase with age.

By using an FSA to pay for eligible healthcare expenses with pretax income, workers can preserve more of their take-home pay than they might otherwise have available. The money saved through lower taxes could potentially be directed toward retirement accounts, emergency savings or other financial priorities.

For example, an employee who saves hundreds of dollars annually through FSA tax benefits could use those savings to increase contributions to a 401(k) or an individual retirement account (IRA). Over several years, consistently investing even relatively small amounts could help build a larger retirement portfolio through compound growth.

However, workers should understand that FSAs are not retirement savings accounts. Unlike Health Savings Accounts (HSAs), they generally do not allow balances to accumulate indefinitely or be invested. HSAs, which are available to eligible individuals enrolled in qualifying high-deductible health plans, offer the ability to carry balances forward from year to year and invest funds for future healthcare expenses.

This distinction is particularly important for younger workers who are building retirement savings and older employees preparing for healthcare costs after leaving the workforce.

How Workers Can Avoid Losing Unused FSA Money

Financial experts recommend estimating healthcare expenses carefully before deciding how much to contribute. Recurring prescriptions, medical appointments, insurance deductibles, dental treatments, vision care and healthcare expenses for eligible dependents should all be considered.

Workers should also understand their employer's specific FSA rules. Some plans allow employees to carry over up to $680 in unused funds into 2026, while others provide a grace period of up to two and a half months to incur additional eligible expenses. Employers can offer either option, but not both.

Employees should check their plan's spending deadline, as it does not always fall on December 31. Some employers also provide additional time to submit receipts for qualifying expenses incurred during the previous plan year.

Before accepting a forfeiture, workers should look for eligible expenses that can help reduce their remaining balance. These may include prescription medications, over-the-counter medicines, sunscreen, menstrual care products, first-aid supplies, certain health-monitoring devices and eligible telehealth services. Dental appointments, acupuncture and other qualifying treatments may also be covered.

Ultimately, FSAs can provide meaningful tax advantages, but careful planning is essential. Workers should calculate their potential tax savings, understand their employer's policies and make contributions based on realistic healthcare spending expectations.

For those focused on retirement, the broader lesson is that managing everyday expenses and taking advantage of available tax benefits can make a meaningful difference over time. Reducing healthcare costs today may leave more money available to invest, save and prepare for financial security in later years.

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