An FSA is a flexible spending account. You pick a number during open enrollment, your employer pulls it out of your paycheck in equal pieces across the year, and you spend it on medical costs with no federal income tax and no payroll tax on those dollars. In the 22% bracket, $2,000 routed through an FSA costs you roughly $1,560 of take-home pay instead of $2,000.
The rule that burns people is what happens to the leftovers. Money still sitting in a health FSA at the end of the plan year doesn't roll over to you and doesn't come back as cash. It goes to the employer. The IRS calls it use-or-lose, and it's the reason drugstores fill up with people buying contact lens solution in late December.
Two things can soften it, and your employer picks at most one. A grace period gives you up to two and a half extra months into the new year to spend last year's money. A carryover lets you move a capped amount into the next plan year, and the IRS sets that cap and adjusts it for inflation. Your plan can offer a grace period, or a carryover, or neither. It cannot offer both. The plan document says which one you have, and most people have never opened it.
A dependent care FSA, the one that covers daycare and after-school care, has no carryover at all. Whatever is left is gone.
Now the part that runs in your favor. A health FSA is fully available on day one of the plan year. Elect $2,000 in January and you can spend all $2,000 in January, even though your paychecks have only put in $77 so far. If you leave the job in March, you generally keep what you spent and the employer absorbs the difference. Benefits people call that the uniform coverage rule, and it works the opposite way from an HSA, where you can only spend what has actually landed in the account.
An HSA and an FSA are not the same thing and you usually can't have both. An HSA requires a high-deductible health plan, the money stays yours forever, and it can be invested. The health account that gets three tax breaks covers that one. A general-purpose health FSA disqualifies you from contributing to an HSA, and it does that even when your spouse is the one with the FSA, because the FSA covers the whole family. A household with a high-deductible plan on one side and an FSA on the other needs to catch that before open enrollment closes.
Two habits fix most of the problem. Elect low your first year, because a conservative number you actually spend beats a big number you forfeit. Then in October, pull the balance and look at what's left while there are still two months to schedule the dental work or order the glasses. Eligible expenses are broader than people expect. Copays, prescriptions, dental, vision, chiropractic, and since 2020, over-the-counter medicine and menstrual products with no prescription required.
Keep in mind the deadline is your plan year, not the calendar year. Plenty of employers run a plan year that starts in July. Your HR portal shows the real date, and that date is when the money disappears.