How Much to Put in an FSA Without Losing It

An FSA election is one of the few financial decisions you make once a year, cannot change, and are punished for getting wrong in one direction. Elect too little and you lose a modest tax saving. Elect too much and you forfeit real money.

That asymmetry should drive the whole approach, and it usually does not — the common advice is to maximise the tax benefit, which pushes people toward exactly the error that costs more.

Why an FSA balance expires

Money in a health FSA is use-it-or-lose-it. Whatever remains at the end of the plan year is forfeited to the employer.

Plans may offer one of two softeners, but not both:

A carryover of a limited amount into the following year. The limit is indexed and modest.

A grace period of up to two and a half extra months to incur expenses against the prior year's balance.

Many plans also allow a run-out period — extra time to submit claims for expenses already incurred. That is a filing deadline, not extra spending time, and confusing the two is how balances get forfeited by people who thought they had longer.

Check which your plan offers, because it changes the safe election materially. A plan with a carryover lets you elect closer to your estimate; a plan with neither demands conservatism.

The FSA planner works the estimate against your plan's rules.

Estimate from what you actually spent

The reliable method is historical, not aspirational.

Pull last year's medical spending. Insurer statements, pharmacy records, receipts. This is the base and it is more accurate than any guess.

Add what you know is coming. Scheduled procedures, orthodontics, a planned birth, a new prescription, glasses or contacts you replace on a cycle.

Subtract what changed. A resolved condition, a child aging off the plan, a switch to a plan with different cost sharing.

Then elect somewhat below that figure, not above it.

The reason for the haircut: your estimate is a central guess, and the loss function is asymmetric. Under-electing costs you the tax saving on the shortfall — a fraction of the amount. Over-electing costs you the entire excess. Being wrong on the low side is several times cheaper than being wrong on the high side.

What counts, and the surprisingly wide list

People forfeit balances because they underestimate what qualifies. The eligible list is broader than most realise and includes:

Deductibles, copays and coinsurance. Prescriptions. Dental work including orthodontics. Vision — exams, glasses, contacts, lens solution, and corrective surgery. Chiropractic and acupuncture. Mental health care. Physical therapy. Breast pumps and supplies. Fertility treatment. Smoking cessation programmes. First aid supplies, thermometers and blood pressure monitors. Sunscreen above a certain SPF.

Over-the-counter medications and menstrual products are eligible without a prescription under current rules — a change that widened the list considerably and that many people have not updated their assumptions for.

Cosmetic procedures, general health items and insurance premiums are not eligible. Some items qualify only with a letter of medical necessity.

The prescription cost calculator is useful for the drug component, which is often the largest predictable piece.

The rule that runs in your favour

One feature genuinely favours the employee, and it makes a slightly larger election safer than it looks.

The full annual election is available from the first day of the plan year, even though contributions come out of your pay evenly across it.

Elect $2,400, spend it entirely in January on an unexpected procedure, and leave the job in February having contributed only $200. You generally keep the difference; the employer absorbs the loss.

This is the opposite of an HSA, where you can only spend what has been contributed so far. It makes the FSA the better vehicle for a known expense that lands early in the year, and the HSA vs FSA guide covers when each fits.

The corollary is that leaving a job with an unspent balance forfeits it, so a planned departure should shift you toward a smaller election.

Salvaging a balance you are about to lose

If you find yourself over-elected in November, there are legitimate options before the money disappears.

Stock up on eligible supplies. Contact lenses, glasses, first aid supplies, over-the-counter medications you use routinely. This is not waste if you would have bought them anyway.

Schedule the deferred appointment. Dental work, an eye exam, physical therapy you have been putting off. The expense must be incurred by the deadline, not paid — the service date is what counts.

Order a spare pair of glasses or prescription sunglasses.

Check the run-out period. You may have longer to submit than you think for expenses already incurred.

What does not work is prepaying for future services. The expense must be incurred within the plan year.

Life events and the dependent care version

Elections are locked, with exceptions for qualifying life events — marriage, divorce, birth or adoption, a change in employment status, a spouse's coverage change. These allow a mid-year adjustment, usually within a short window after the event. If one happens, act quickly; the window is measured in weeks.

Note also that a dependent care FSA is an entirely separate account with its own limit, covering childcare rather than medical costs. It does not conflict with an HSA, and for households paying for childcare it is frequently worth more than the health version — the daycare cost calculator and the nanny cost calculator cover what those bills look like.

One caution on the dependent care side: it interacts with the childcare tax credit, and you cannot claim both on the same expenses. Which is better depends on income, so it is worth checking rather than assuming the pre-tax route wins.

For the current limits and the eligible expense list, the IRS guidance on health accounts is the authoritative source, and limits are republished each autumn.