Having medical bills that were not paid in the previous year is an unfortunate but common situation for many people When this happens, a natural question arises – can I use my current year’s flexible spending account (FSA) to pay for these past medical expenses?
The short answer is no, you cannot use current year FSA funds to pay for prior year medical bills. However, there are some important nuances to understand regarding this rule and how you can optimize your FSA to cover medical expenses properly. In this article, I will explain the key considerations around using an FSA to pay old medical bills and provide some strategies to make the most of your FSA.
The FSA “Use It or Lose It” Rule
The most critical point is that FSAs have a “use it or lose it” rule This means the funds in your FSA must be used for expenses incurred within that plan year. The plan year is usually tied to the calendar year, from January 1st to December 31st
Any money left in your FSA at the end of the year is forfeited per IRS regulations. It cannot be returned to you or carried over to the next year. The only exception is if your employer offers a grace period which typically gives you an additional 2.5 months into the new year to use up the old year’s balance.
But in general, FSA dollars allocated in one year must be used to cover expenses that occurred within the corresponding year. They cannot be applied to past medical bills from the prior year.
The Reason for the Restriction
This restriction comes directly from Section 213(d) of the IRS tax code defining qualified medical expenses under a FSA. The key criteria is that the expenses must be incurred during the plan year.
The goal is to maintain the FSA’s status as a tax-advantaged account. The contributions are made pre-tax, and withdrawals for medical expenses are tax-free. Allowing expenses from a previous tax year would essentially give double tax benefits for a single expense.
Therefore, the use-it-or-lose-it rule ensures the FSA funds align properly to each year’s tax situation. While inconvenient at times, this prevents abuse of the FSA tax incentives.
Alternative Options to Pay Old Medical Bills
Given this restriction, you may be wondering how to pay off old medical bills if you can’t use current FSA funds. Here are some potential options to explore:
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Use the previous year’s FSA if still open – If you have an old FSA account still open with a balance, you can draw from that to pay old bills if within the account period.
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Payment plans – Many hospitals and health providers offer payment plans to pay off larger medical debts over time. This allows you to spread repayment out across multiple years.
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Health savings account (HSA) – If you have an HSA, these funds can be used to pay any past medical expenses tax-free, as HSAs do not have a use it or lose it rule.
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Credit cards or personal loans – As a last resort, you may need to use regular financing options and pay back over time at regular rates.
Strategies to Use FSA Funds Optimally
While you cannot directly use current year FSA funds for old bills, some helpful strategies can ensure you maximize the value of your FSA and use the funds properly:
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Take advantage of grace periods – If given the option, utilize any grace period offered to buy yourself more time to use up last year’s balance.
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Submit claims quickly – Submit your reimbursement claims as soon as possible in the plan year. This gives you plenty of time to identify any leftover funds.
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Track expenses carefully – Keep detailed records so you know exactly what medical expenses have already happened vs. what is still upcoming.
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Plan carefully – Estimate upcoming expenses for the year and contribute accordingly to avoid having too much surplus at year end.
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Spend down leftover funds – If you have a buffer in your FSA as the year closes, use the balance for routine healthcare like new glasses, contacts, prescriptions.
Unfortunately, FSAs cannot directly pay for prior year medical expenses due to IRS rules. Yet some careful planning around your FSA contributions, timely submissions, and active use of funds can still help maximize this benefit. While the “use it or lose it” rule causes FSAs to forfeit $500 million in unused funds each year, people who understand the nuances can optimize their account. With the right strategy, you can reduce stress around medical bills and make the most of your FSA.
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Using a Flexible Spending Account (FSA)If you have a health plan through a job, you can use a Flexible Spending Account (FSA) to pay for health care costs, like
The amount you pay for covered health care services before your insurance plan starts to pay. With a $2,000 deductible, for example, you pay the first $2,000 of covered services yourself.
Refer to glossary for more details. ,
A fixed amount ($20, for example) you pay for a covered health care service after youve paid your deductible.
Refer to glossary for more details. ,
The percentage of costs of a covered health care service you pay (20%, for example) after youve paid your deductible.
Refer to glossary for more details. , and some drugs. They can lower your taxes.
Creative ways to use your Flexible Spending Account before the year-end deadline
FAQ
Can you pay previous year medical bills with FSA?
Can I use 2024 FSA for 2023 expenses?
Is FSA based on date of service or payment?
Can I use my FSA to pay medical debt?
Can I use my FSA to pay bills from prior years?
New comments cannot be posted and votes cannot be cast. No, you can’t use this year’s FSA to pay bills from prior years. I wouldn’t call it trouble, but you’ll be taxed on the amount you’ve spent on prior year bills. No. The FSA year and the medical expense service date must match, i.e. only 2022’s FSA can pay for expenses incurred in 2022.
Can I use my health care FSA to pay medical expenses?
Yes, the FSA does not require that your dependents be covered under your health insurance plan. You can use your account to pay for eligible health care expenses for your family, regardless of the health insurance plan in which they are enrolled. 4. Can I use my Health Care FSA to reimburse outstanding medical expenses from the prior year?
Can I use leftover FSA money to pay medical bills?
If you have a flexible spending account (FSA) through your employer, you may be wondering if you can use leftover funds to pay medical bills from the previous year. Unfortunately, the general rule is that FSA dollars can only be used for expenses incurred within the current plan year.
Can I use my 2022 FSA to pay medical expenses?
No, you can’t use this year’s FSA to pay bills from prior years. I wouldn’t call it trouble, but you’ll be taxed on the amount you’ve spent on prior year bills. No. The FSA year and the medical expense service date must match, i.e. only 2022’s FSA can pay for expenses incurred in 2022.
Can I extend my FSA If I don’t pay medical expenses?
Even though FSAs are use-it-or-lose-it accounts, organizations may adopt options that could extend the time you have to spend remaining funds. One option is called a Grace Period. Your employer may offer up to 2½ months at the end the plan year to submit eligible medical expenses. Another option is called a Carryover.
When are medical expenses incurred in an FSA plan?
Expenses must be incurred during the FSA plan year. As noted in IRS guidelines, “expenses are incurred when the employee (or the employee’s spouse or dependents) is provided with the medical care that gives rise to the medical expenses, and not when the employee is formally billed, charged for, or pays for the medical care.”