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For 2024, the IRS has given employees a valuable safety net for their healthcare savings: they can roll over up to $640 of unused Flexible Spending Account (FSA) funds into 2025. This is a huge shift from the old, unforgiving "use-it-or-lose-it" rule that used to cause so much anxiety at year-end.
Demystifying FSA Limits and Carryover Rules
Think of an FSA as a dedicated savings account for healthcare, but with a major tax advantage—every dollar you contribute is pre-tax, which lowers your taxable income for the year. For decades, the biggest drawback was the risk of forfeiting any money left over when the clock struck midnight on December 31st.
The FSA carryover limit was created to solve that exact problem.
This rule lets employees roll a set amount of unused money into the next plan year. It gives them the confidence to contribute what they actually think they'll need, without the constant fear of losing their hard-earned dollars. For HR leaders, this isn't just a minor administrative update; it’s a powerful tool for boosting employee financial wellness and making your benefits package far more competitive.
A Look at Recent and Future FSA Changes
The IRS adjusts these limits almost every year to keep up with inflation, so the numbers are always on the move. For instance, in 2024, the health FSA contribution limit jumped to $3,200—a solid $150 increase from 2023. As a result, the maximum carryover amount for that year rose to $640, giving employees even more breathing room. You can dive deeper into these annual adjustments from leading benefits experts.
Looking ahead, we expect this trend of steady increases to continue. The projections for 2025 and 2026 show that the FSA is only becoming a more valuable savings vehicle for employees.
As we look to the next couple of years, projections indicate that both contribution and carryover limits will continue to rise with inflation. This makes long-term planning for both employers and employees even more important.
Projected FSA Contribution and Carryover Limits 2025 vs 2026
| FSA Limit Type | 2025 Amount (Projected) | 2026 Amount (Projected) | Projected Increase |
|---|---|---|---|
| Annual Contribution Limit | $3,300 | $3,450 | $150 |
| Carryover Limit | $660 | $690 | $30 |
These projections highlight how the FSA is adapting to rising healthcare costs, offering more tax-advantaged space for employees to save. Communicating these future increases can help your team plan their contributions more strategically during open enrollment.
The FSA carryover acts as a financial buffer. It transforms the conversation from "How much will I lose?" to "How much more can I save?" for employees managing their healthcare costs.
Clearly communicating how these rules work is absolutely essential. Modern benefits platforms, like our own at Benely, are designed to simplify this process. We can help you explain the real-world advantages of the carryover during open enrollment, ensuring your team not only understands the benefit but truly values it. It's how you turn a complex compliance topic into a clear win for your employees.
Carryover vs. Grace Period: What's Best for Your Team?
When you're designing a Flexible Spending Account (FSA), one of the most important decisions you'll make is whether to offer a carryover or a grace period. This isn't just a small administrative choice—it's a strategic decision that shapes how your employees use their benefits and manage their healthcare finances.
Think of it this way:
- A carryover is like rollover data on a cell phone plan. It lets employees keep a portion of their unused funds and add them to their balance for the next year, creating a safety net for unexpected costs.
- A grace period works more like an extension on a project deadline. It gives employees an extra 2.5 months to spend the previous year's FSA money on new expenses.
The IRS is clear: you can offer one or the other, but never both. So, how do you pick the right one for your team? This is a huge decision, because without one of these options, your employees are stuck with the dreaded "use-it-or-lose-it" rule, a major source of financial anxiety and forfeited dollars.
This simple flowchart shows the choices an employee has at the end of the year, including how the carryover option fits in.
As you can see, the carryover gives employees a valuable third path beyond just spending everything or losing their money. It directly reduces that year-end scramble.
Matching the Feature to Your Team
The best choice really depends on the habits and needs of your workforce.
A grace period is often a great fit for employees with predictable, recurring expenses. For example, if someone on your team always orders new glasses or schedules dental work in January, they can easily use up last year's balance during that short window. It gives them a clear, defined timeline to get their account to zero.
On the other hand, a carryover provides much more flexibility and long-term peace of mind. It’s perfect for employees who are hesitant to contribute much to their FSA because they’re afraid of losing money. It’s also ideal for anyone who wants a financial cushion for a major medical issue that could pop up at any point in the following year. With the 2024 FSA carryover limit at $640, it’s a substantial buffer.
This choice matters. Forfeiture is incredibly common. An analysis of 3.2 million FSAs revealed that over 50% of accountholders forfeit at least some of their balance. You can read the full research from the Employee Benefit Research Institute.
Understanding your team’s spending patterns is the first step toward making a smart decision. For more guidance on choosing between different types of spending accounts, check out our guide on whether an HSA, HRA, or FSA is right for your business.
Ultimately, picking the right feature helps your team get the most out of their benefits and reduces the stress that comes with managing healthcare costs. Partnering with a benefits expert can help you analyze your team’s needs and put the best solution in place.
How to Implement and Manage Your FSA Carryover
Deciding to offer an FSA carryover is a great first step. But moving from that decision to a live, working benefit requires a clear game plan. It’s a process that touches compliance, payroll, and employee communication, and getting it right ensures the new feature is a win for everyone, not an administrative headache.
The first, and most critical, task is a legal one: you have to formally amend your plan documents. You can't just announce a carryover. It must be written into your Section 125 Cafeteria Plan and the FSA's Summary Plan Description (SPD). This isn't just paperwork; it’s a non-negotiable step to keep your plan compliant with IRS rules.
Once the legal side is buttoned up, you’ll need to get your payroll and benefits administration teams on the same page. They’re the ones on the ground who will need to track the carryover balances, make sure payroll deductions are correct for the new plan year, and manage the funds according to the new rules.
Key Implementation Steps
To launch a carryover feature without a hitch, you need a playbook. Following these steps ensures nothing critical gets missed.
- Amend Your Plan Documents: Work with your benefits consultant or legal counsel to officially update your plan documents. This is where you’ll formally add the carryover provision. You'll need to specify the carryover amount—you can go up to the IRS maximum ($640 for plans ending in 2024) or choose a lower amount that works for your company.
- Coordinate with Your TPA: Your Third-Party Administrator (TPA) is your most important partner here. You need to confirm they can actually support the carryover feature. Can their system track the carried-over funds separately from new contributions and manage them correctly? Don't assume; get confirmation.
- Create a Clear Communication Plan: Don't spring this on employees during open enrollment. Announce the new feature ahead of time. Explain how it directly benefits them by taking away the fear of losing their money. Use every channel you have—emails, company-wide meetings, and your intranet—to make sure the message lands.
The Power of an Integrated Platform
Trying to manage all these moving parts with spreadsheets and manual tracking can quickly become a nightmare, especially for smaller HR teams. This is exactly where modern benefits platforms prove their worth. The right technology automates the heavy lifting, turning what could be a complex project into a simple, set-it-and-forget-it function.
An integrated platform provides a single source of truth for everything—from tracking enrollment to managing compliance documentation. This is incredibly valuable when you’re rolling out a change like an FSA carryover. If you're just getting started with FSAs, our guide on how to set up an FSA for small businesses is a great resource.
Key Takeaway: A successful FSA carryover launch is all about execution. By proactively handling plan amendments, coordinating with your vendors, and communicating clearly with your team, you can make sure this valuable benefit is seen as a major win. An integrated system makes it even easier by automating balance tracking, simplifying compliance, and giving your employees a seamless experience.
Real-World Scenarios: How the Carryover Actually Impacts Your Team
Theory is one thing, but stories are what make the real-world impact of an FSA carryover click. To really understand how the FSA carryover limit works in practice, let's walk through a few scenarios with different types of employees. These stories show just how much this simple plan feature can reduce financial stress and protect your team's hard-earned money.
Scenario 1: The Planner
First, meet Maria, "The Planner." She knows she has knee surgery coming up next year and smartly decides to max out her FSA to cover her deductible and coinsurance. She puts in the full $3,200 for the 2024 plan year.
The surgery is a success, but her final out-of-pocket costs only add up to $2,800. In a plan without a carryover, the leftover $400 in her account would be gone forever. But because her employer offers a carryover, that $400 automatically rolls right into her 2025 FSA, giving her a nice head start on next year's medical expenses. No frantic, last-minute spending required.
Scenario 2: The Cautious Contributor
Next up is David, "The Cautious Contributor." He's always been spooked by the "use-it-or-lose-it" rule, so he plays it safe and only contributes a conservative $500 to his FSA for prescriptions. But in December, he chips a tooth and suddenly needs an emergency crown that costs $1,200.
He drains his $500 FSA balance but is still stuck paying $700 out-of-pocket right before the holidays. When he realizes how the $640 carryover for 2024 would have acted as a safety net, it’s a lightbulb moment. For the next plan year, he feels confident enough to increase his contribution to $1,500, knowing he can save more on taxes without the same high risk of forfeiture.
Scenario 3: The Forfeiture-Phobic
Finally, let's look at Sarah, who we'll call "The Forfeiture-Phobic." A few years back, she lost $200 in her FSA and has been wary ever since, putting in just $300 annually. This is despite having a family with regular medical and dental check-ups, meaning she pays for most of their care with post-tax money and misses out on significant tax savings.
Her HR team decides to launch a clear communication campaign explaining exactly how the carryover protects employees. They use a simple, direct example in their materials:
"If you contribute $1,000 and only spend $400, the remaining $600 will roll over to next year. You won't lose a dime. Think of it as your financial safety net."
This message finally connects with Sarah. She grasps that with the $640 carryover for 2024, her risk is practically zero. She decides to contribute $2,000 for the following year, a move that will save her family over $500 in taxes. For the HR team, this is a huge win—proof that effective communication can directly boost employees' financial wellness.
These stories highlight a critical point: the carryover isn’t just a number in your plan document; it’s a feature that genuinely changes employee behavior for the better. When your team understands how it protects them, they can make smarter, more confident benefits decisions. A modern benefits partner like Benely can help you craft and deliver these kinds of messages effectively.
The Strategic Value of a Modern FSA Plan
For many company leaders, the conversation around Flexible Spending Accounts (FSAs) starts and ends with administrative paperwork. But a modern FSA—especially one with a carryover feature—is much more than a simple line item in your benefits package. It’s a strategic tool that delivers a real return on investment in talent, wellness, and stability.
Offering a carryover transforms the FSA from a high-stakes gamble into a reliable financial planning tool for your team. This one change has a direct impact on your business. When employees aren't scrambling to spend down their balance for fear of losing it, they feel more financially secure. That peace of mind is directly linked to higher focus and productivity, since financial stress is one of the biggest distractions at work.
From Benefit Feature to Business Advantage
For founders, CFOs, and HR leaders, it's critical to frame the FSA carryover as a strategic investment. This isn't just a "nice-to-have" perk; in a tight labor market, it's a competitive advantage. Top candidates scrutinize benefits packages, and a flexible, employee-first FSA can be the detail that makes them choose you.
Here’s how this seemingly small feature creates tangible business value:
- Attracts Top Talent: A plan with a carryover immediately signals that you're a modern employer who respects your employees' financial well-being.
- Boosts Financial Wellness: By removing the "use-it-or-lose-it" panic, you empower employees to save confidently for healthcare, which reduces their financial anxiety.
- Increases Productivity: Employees who are less stressed about their personal finances are more present and focused on the job, contributing to better business performance.
- Improves Retention: A strong, supportive benefits package is a powerful retention magnet. When employees feel their company is invested in their health, they're far more likely to stay.
This is where having a modern benefits partner becomes essential. Working with experts can give you access to data that helps you benchmark your offerings against the competition. For instance, a quality benefits administration platform can provide insights into what similar companies in your industry offer, ensuring your plan is not just good, but competitive.
The Budgetary Impact of Reduced Forfeitures
From a purely financial standpoint, the carryover feature does have a direct effect on your company's budget. Under the old "use-it-or-lose-it" rule, employers could use forfeited FSA funds to offset administrative costs. While that might sound like a small win, it comes at the high price of employee frustration and distrust.
A plan that generates high forfeiture rates is a plan that is failing your employees. The goal of a benefits program should be to deliver value, not to generate operational funds from unused employee contributions.
Adopting a carryover dramatically reduces these forfeitures, which is a clear win for your team. It builds trust and proves you're genuinely committed to their welfare. While this might mean less money coming back from forfeitures, the ROI from a more engaged, stable, and satisfied workforce far outweighs that minor budget line. A flexible plan that incorporates the FSA carryover limit 2024 rules is a powerful statement about your company culture.
Answering Your Top FSA Carryover Questions
Even after you’ve got the basics down, the FSA carryover rule tends to spark a few common questions. Let's walk through some of the most frequent "what if" scenarios we hear from HR teams and their employees.
Does the Carryover Amount Reduce My Next Year's Contribution Limit?
Nope, and that’s one of the best parts about it. The carryover funds are added right on top of your new plan year's election. It doesn’t eat into your contribution space at all.
Think of it this way: if you roll over the full $640 from 2024 into 2025, you can still contribute up to the full IRS limit for 2025. If that limit is, say, $3,300, your total available FSA balance for the year would be $3,940. It’s a powerful way to boost your healthcare spending power.
Can I Have an HSA and an FSA With a Carryover?
This is a tricky one, and the answer is usually no—but with a big exception. You generally can't contribute to a Health Savings Account (HSA) if you're also enrolled in a general-purpose Health FSA. The IRS considers that having double coverage.
The exception? You can pair an HSA with a Limited-Purpose FSA (LP-FSA). An LP-FSA is designed to cover only eligible dental and vision expenses, which keeps you eligible for HSA contributions. Many savvy employers offer this exact combo to give employees the best of both worlds.
The compatibility between an FSA and an HSA really boils down to the type of FSA. A general-purpose FSA is a no-go for HSA contributors, but a Limited-Purpose FSA is a perfect match. Always double-check your plan design to be sure.
What Happens to My Carryover Funds If I Leave My Job?
FSA funds, including any money you've carried over, are tied to your employer. If you leave your job, you typically forfeit that balance. The money doesn't follow you.
Your main option to access the funds after termination is to elect COBRA coverage for your FSA. This lets you continue spending your balance on eligible expenses, but you'll have to pay the full premium plus an admin fee. It's something you'll want to discuss with your HR team during the offboarding process to see if it makes financial sense.
My Employer Doesn’t Offer a Carryover. What Can I Do?
Because the carryover is an optional plan feature, your employer has to actively choose to offer it. If your company doesn't have it, you can't enroll on your own. But that doesn't mean you're out of options.
You can advocate for it. Start a conversation with your HR manager or use your company’s benefits feedback channels. Explain how a feature like the FSA carryover limit for 2024 helps reduce the "use-it-or-lose-it" anxiety and encourages more employees to participate in the FSA. Sharing articles or data on how it improves employee financial wellness can make a really strong case for adding it next year.
Navigating the ins and outs of employee benefits doesn't have to feel so complicated. At Benely, we’re experts at making benefits simple and effective for companies of all sizes. Learn how Benely can help you build a competitive benefits package that your team will love.
