Year-End FSA Check-In: How to Protect Employee Dollars and Ensure Plan Compliance (October 2026 TogetHR Times)
By Melissa McGraw
As the end of the year approaches, companies often find themselves juggling open enrollment, performance reviews, and holiday scheduling. During this busy season, another important item deserves a place on the priority list: guiding your team through the year-end Flexible Spending Account (FSA) wrap-up.
Helping employees navigate their FSA is more than a helpful gesture. It supports their financial wellness while helping your organization avoid year-end confusion, missed deadlines, and administrative headaches.
IRS Rules for 2026
For the 2026 plan year, ensure your team is aware of these core FSA guidelines:
Contribution Maximums: The 2026 employee contribution limit for a Healthcare FSA is $3,300.
The Use-It-or-Lose-It Rule: By default, Internal Revenue Code rules require employees to forfeit FSA funds that remain unused at the end of the plan year.
Employer Relief Options: Check your specific plan document to confirm whether your company offers an IRS-approved safety net. You may offer one of the following:
The Carryover Option: Employees can roll over a capped amount of unused funds into 2027. For 2026 funds moving into 2027, the maximum IRS rollover limit is $660.
The Grace Period Option: Employees get up to an extra 2.5 months after the plan year ends to incur new medical expenses using their 2026 funds.
Communicate with employees early so they have enough time to decide how to use any remaining FSA funds. A proactive approach can help prevent both panicked employees and overwhelmed support queues.
Once employees understand the key FSA rules, the next step is communicating those rules early enough for them to act.
A year-end FSA communication plan works best when it connects compliance requirements with practical employee action. The timeline below can help employers move from general reminders to specific, deadline-driven messaging.
October: Connect Enrollment Decisions to Current Balances
The Goal: Connect the past with the future.
The Message: As employees choose their 2027 contribution amounts during open enrollment, prompt them to log into their benefits portal and check their current 2026 balance. This prevents them from over-allocating funds next year if they realize they are struggling to spend this year's allocation.
November: The 30-Day Warning
The Goal: Inspire action before holiday schedules fill up.
The Message: Remind employees that doctors, dentists, and optometrists book up rapidly at the end of the year. Urge them to schedule routine check-ups, teeth cleanings, or vision exams now while appointments are still available.
December: The Final Countdown
The Goal: Provide clear steps for employees to take.
The Message: Clearly list your company’s specific deadlines. Specify the exact date their FSA debit card will stop working for 2026 funds and explicitly detail the difference between spending deadlines and submission deadlines.
A Note on Non-Calendar Plans
While many companies align their FSA with the calendar year, your timeline depends on your specific benefit plan year. If your company uses a fiscal plan year, such as November 1 to October 31, your year-end communication, spending deadlines, and IRS rollover limits apply to the end of that 12-month cycle—not December 31. Shift your communication timeline accordingly so reminders align with your plan’s actual expiration date.
Clarifying the Difference Between “Run-Out” vs. “Grace Periods”
A frequent source of confusion—and employee frustration—is the difference between a grace period and a run-out period. If your company offers either option, clear communication on this topic can save time and help employees understand what they can still do after the plan year ends.
The Grace Period (An Extension to Spend): This gives employees up to 2.5 extra months to incur new claims. If your plan year ends on December 31, a grace period would allow them to receive eligible medical care through March 15 and use last year’s money to pay for it.
The Run-Out Period (An Extension to Submit): This does not grant extra time to spend money. Instead, it provides extra time to submit receipts for services that already happened during the plan year. For example, if the plan year ends on December 31 and the run-out period is 60 days, an employee who purchased new glasses in November would have until March 1 to submit the receipt to the administrator.
Best Practices for Your FSA Communication Strategy
Beyond timing, the effectiveness of your FSA reminders depends on how targeted, practical, and visible they are.
Reaching employees during the busy year-end season requires a thoughtful, targeted approach. To ensure your reminders get noticed and motivate action, consider these strategic communication practices:
Segment Your Messaging: Work with your Third-Party Administrator (TPA) to pull a report of employees who still hold significant unspent balances. Send targeted, direct reminders specifically to them rather than cluttering the inboxes of employees who have already zeroed out their accounts.
Provide Practical Spending Ideas: Employees often panic-buy items they do not actually need. Remind your team that FSA funds cover some everyday essential health products like prescription sunglasses, first-aid kits, menstrual care items, sunscreen, and over-the-counter medications.
Leverage Multiple Channels: Do not rely solely on email. Feature FSA deadlines on your company intranet homepage if your company has one, highlight them briefly during all-hands meetings, post a reminder in the breakroom, and ask managers to post a quick reminder in team channels such as Microsoft Teams.
Behind the Scenes: What Happens to Forfeited Funds?
Even with strong communication, some employees will inevitably leave funds behind. When that happens, employees may assume the employer simply pockets the cash as profit—or that it goes directly to the IRS.
Under IRS Section 125 cafeteria plan regulations, forfeited funds generally revert to the employer. However, those dollars should not be treated as unrestricted company earnings. The IRS permits specific, limited options for how an employer can use residual funds:
Offset Administrative Costs: The most common approach is using forfeited dollars to pay your TPA vendor fees or to cover internal plan administration expenses.
Reduce Future Employee Contributions: Employers may apply forfeited funds uniformly to reduce required employee contributions for all plan participants in the following year.
Equitable Redistribution: You may divide the money and return it to all plan participants on a reasonable and uniform basis, such as a per-capita or pro-rata split. Crucial Compliance Note: You can never return money directly to an individual employee based on their specific personal forfeiture, as doing so violates the use-it-or-lose-it doctrine. Any returned funds are also treated as taxable wages.
Bringing It All Together
An FSA is a powerful tool for employee financial wellness, but its rigid timelines can quickly turn a valued benefit into a source of workplace frustration. A proactive, clear, and well-timed communication strategy can protect employees’ hard-earned dollars, reduce last-minute pressure, and help keep your plan compliant.
To prepare for an FSA wrap-up with less stress before the holiday season begins, take time now to review your plan documents, coordinate with your TPA, and finalize your communication timeline.
