Here's What Happens When You Contribute Too Much to Your FSA (2024)

FAQs

Here's What Happens When You Contribute Too Much to Your FSA? ›

What happens if you overcontribute to your FSA? FSAs have a "use it or lose it" policy. Any contributions you make expire by an annual deadline, usually the first of the next year. If you don't use this money before the year ends, it might ultimately end up in your employer's hands.

If you contribute more than the allowed maximum to a Dependent Care Flexible Spending Account (FSA) in the US, the amount over the limit is treated as taxable income. This means you won't get the usual tax benefits on the excess contribution.

The Form 2441 will compute the amount of any excess dependent care FSA contributions, which must be reported as taxable income on the Form 1040 by writing “DCB” (dependent care benefits) next to Line 1. There is no penalty associated with this process. The excess amounts are merely converted to taxable income.

If the FSA is overspent, the annual election amount may be adjusted, and the per-pay-period deduction amount is increased to make up for the missed contributions. Either way, you would be able to submit manual claims for reimbursem*nt for eligible expenses incurred while the garnishment was in place.

Your FSA and reimbursem*nt account balances, at year-end and beyond. After you spend your entire account balances, you'll need to pay for any additional eligible expenses from your own funds until the new year.

What happens if I contribute more than the IRS annual maximum? If your HSA contains excess or ineligible contributions you will generally owe the IRS a 6% excess-contribution penalty tax for each year that the excess contribution remains in your HSA. It is recommended you speak with a tax advisor for guidance.

However, you wouldn't be able to use that money to pay for any newly incurred expenses. Where does the unused money go? Unused FSA money returns to your employer.

There are government rules that control what's allowed with forfeited FSA funds: The funds can't be returned to individual employees based on the amount forfeited because that would violate the “use it or lose it” rule. You can't donate the funds to charity or take a tax deduction from them.

The IRS created the "use or lose" rule, which states that all money left in your FSA is forfeited after the benefit period ends.

If a person with an FSA leaves their job, any money remaining in their FSA is forfeited to the employer.

Can I go over my FSA balance? ›

If it's in their account at the end of the year and you've set it up to rollover, it will automatically rollover. The rollover amount does not count toward the annual FSA contribution limit. As a result, an employee can elect the full annual amount and still go over that amount by up to $640 if that much is left over.

Your FSA account can be used for eligible medical expenses only and you are solely liable for the use of the plan. If the Benefits Card is accidentally or intentionally utilized for ineligible expenses, you are responsible for reimbursing your account.

You may want to think about maxing out contributions, Musson says. It might lower your paycheck every month. But remember: You'll be paying for healthcare costs from a tax-free account, not your personal checking account. “You can't predict the future.

Healthcare FSA contribution limits

The IRS contribution limit for healthcare FSAs is $3,050 for 2023 and $3,200 in 2024. You can use this money to pay for qualified medical expenses for you, your spouse, and any dependents which you claim on your tax return.

Normally, you can only elect contributions into your FSA during a yearly open enrollment period, but there are exceptions. A qualifying event affects your eligibility for coverage under your specific FSA plan. When a qualifying event occurs, many employers allow you to make a mid-year change in elections.