Money left in your dependent care FSA at the end of the plan year is forfeited to your employer. IRS rules treat a dependent care flexible spending account as a use-it-or-lose-it arrangement under a Section 125 cafeteria plan, so any balance you haven’t spent by the plan year deadline (plus any grace period your employer offers) is gone permanently.1FSAFEDS. What Is the Use or Lose Rule With the contribution cap jumping to $7,500 for 2026 (or $3,750 if married filing separately), up from $5,000, the stakes for over-electing are higher than they have been in decades.2Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs
Why the Money Is Forfeited
A dependent care FSA is a salary-reduction benefit, not a savings account with your name on it. The IRS treats any balance that carries into the next plan year as deferred compensation, which cafeteria plans are not permitted to provide. To preserve the tax-free status of every dollar you contributed, plans must forfeit whatever you didn’t spend by the deadline.1FSAFEDS. What Is the Use or Lose Rule
Your employer cannot waive this. No government agency can grant an exception. The rule is structural, and it applies whether you missed a deadline by a day or never used the account at all.
Two Deadlines Decide Whether Your Money Is Actually Lost
People forfeit money because they confuse two different dates. Both are set by your plan, and both matter.
The first is the grace period. Most employers extend the spending window by two and a half months past the end of the plan year. On a calendar-year plan, that means care provided through March 15 can still be reimbursed from last year’s balance.3FSAFEDS. FAQs – Dependent Care FSA Plans with a different fiscal year shift accordingly. Not every employer offers a grace period, so check your Summary Plan Description.
The second is the run-out period, an administrative window after the grace period during which you can still file paperwork for expenses already incurred. Many plans set a run-out deadline of April 30, but the exact date lives in your plan document. If you had eligible care in February but don’t submit the receipts before the run-out ends, the money is forfeited even though the care itself qualified.
Care received after the grace period closes cannot be reimbursed from the prior year’s funds, no matter how fast you file. Care received during the grace period but claimed after the run-out closes is equally forfeited. Both dates have to be met.
There Is No Carryover for Dependent Care FSAs
If you’ve heard that FSAs let you roll unused money into the next year, that provision applies only to health care FSAs. The IRS added a limited carryover option for health FSAs in 2013.4Internal Revenue Service. Notice 2013-71 – Modification of Use-or-Lose Rule for Health Flexible Spending Arrangements Dependent care FSAs were never included.
Congress did allow temporary carryovers for dependent care FSAs during the pandemic, covering plan years ending in 2020 and 2021.5Internal Revenue Service. Notice 2021-26 – Dependent Care Assistance Programs That relief has expired. For 2026 plans, an employer can offer a grace period or nothing at all. Those are the only two options.
Where the Forfeited Money Goes
Forfeited balances revert to the employer that sponsored the plan. Employers typically apply them to plan administration costs. The IRS prohibits returning the money to you in any form, whether as cash, a bonus, or an added benefit.4Internal Revenue Service. Notice 2013-71 – Modification of Use-or-Lose Rule for Health Flexible Spending Arrangements
There is no separate tax consequence from the forfeiture itself. Your contributions came out pre-tax, so the forfeited amount was never in your taxable income to begin with. You already received the tax savings when the money was withheld from your paycheck. You simply lose the underlying dollars. You cannot deduct the forfeited amount, and it is not reported as income.
What Happens to Your Balance If You Leave Your Job
Leaving your employer mid-year does not automatically wipe out your remaining balance. You can keep submitting claims for eligible expenses incurred through the end of the plan year or until your balance runs out, whichever comes first.6FSAFEDS. What Happens if I Separate or Retire Before the End of the Plan Year The expenses have to be for care provided while you were still employed or actively looking for work.
The catch is the grace period. To use the 2.5-month extension on a calendar-year plan, you generally need to be actively employed and contributing through December 31.6FSAFEDS. What Happens if I Separate or Retire Before the End of the Plan Year Leave in October, and you can use your balance through December 31, but the window into March disappears. Any leftover money is forfeited when the plan year ends.
Dependent care FSAs are also generally exempt from COBRA, so you cannot keep contributing after separation the way you might with a health plan. If you know you’re leaving, review your balance early. You may be able to accelerate eligible expenses or reduce your election through a qualifying life event before your last day.
How to Avoid Losing Money in the First Place
Forfeiture is avoidable with a little planning. The people who lose money tend to over-elect during open enrollment and then never adjust when their situation changes.
- Estimate conservatively. Add up your known, recurring care costs (weekly daycare, after-school programs, summer camp) and elect that amount. Paying a little extra out of pocket is better than losing money you already set aside.
- Check your balance quarterly. Most benefits portals show your remaining balance and year-to-date contributions. Five minutes each quarter tells you whether you’re on pace or heading toward a forfeiture.
- Use qualifying life events. A child aging out at 13, a change in provider, a spouse’s job change — any of these can let you reduce or stop your election mid-year. Employers typically require the request within 30 to 60 days of the event. The change in care cost or arrangement rule is specific to dependent care FSAs and is the most underused tool for avoiding forfeiture.7FSAFEDS. Qualifying Life Events Quick Reference Guide
- Front-load grace period spending. If you reach late November with a balance left, look for eligible expenses you can schedule or prepay for January and February care. The grace period exists for exactly this.
- Set a reminder for the run-out deadline. Incurring the expense is not the same as filing the claim. If your plan’s paperwork deadline is April 30, put it on the calendar. Money already spent on qualifying care can still be forfeited if the claim never gets filed.
One additional constraint to keep in mind when sizing your election: the exclusion cannot exceed the lower-earning spouse’s earned income. If one spouse earns $4,000 for the year, the household’s exclusion caps at $4,000 regardless of the $7,500 statutory maximum. Full-time students and spouses unable to care for themselves are deemed to earn $250 per month with one qualifying dependent, or $500 per month with two or more.8Internal Revenue Service. Publication 503 (2025), Child and Dependent Care Expenses Contributing above what the earned-income rule allows produces its own reconciliation problem at tax time, separate from the plan-year forfeiture question.