One day in a school shortly before Christmas, an inept magician named Professor Hinkle is hired to perform for the children. Following this, the children go outside for recess and build a snowman, whom they name Frosty. However, Hinkle's rabbit Hocus Pocus, escapes from the building while wearing his hat, which the children decide to put on top of Frosty's head. To their surprise, the magic of the hat causes Frosty to come to life.
This delights the students, but after seeing that the hat is actually magic, the agitated Hinkle wants it back. The children refuse to turn it over to him, but he eventually gets it. After he leaves, Hocus returns the hat to the children, thus bringing Frosty to life for the second time. The children are very happy with their new friend, but the temperature is rising and Frosty must leave for somewhere that is colder. Frosty explains that the only place he won't melt is the North Pole. They parade through town to the train station, shocking passersby and a policeman. When they get to the station however, they find that they do not have enough money to buy tickets to the North Pole. So, Karen, Frosty, and Hocus sneak into the back of a train headed north. Hinkle also sneaks aboard, determining to get his hat back.
While Frosty is safe from melting in the refrigerated car, Karen is freezing so the group leaves the train and Hocus gathers a group of woodland creatures to build a fire for her. Frosty knows that it is best if Karen is brought home and he and Hocus decide to enlist the help of Santa Claus to transport her there. Hocus leaves to search for Santa, but Hinkle comes back to steal the hat back. Being too fast for Hinkle, Frosty and Karen race down the hill to a small greenhouse used to grow poinsettias. Frosty carries Karen inside where she will be warm and safe. However, Hinkle has followed them on foot and he locks Frosty and Karen inside.
Hocus brings Santa to the greenhouse only to find Karen crying over a melted Frosty. Santa explains to Karen that Frosty is made of Christmas snow and can never melt away. He then opens the greenhouse door which revives Frosty. However, Hinkle arrives, once again claiming that the hat is still his. Santa warns him that if he takes the hat, he will never get another Christmas present from him for the rest of his life. Hinkle begs for another chance and Santa tells him that if he starts acting nicer and writes a formal apology, he might reconsider and possibly give Hinkle a new hat for Christmas, to which an overjoyed Hinkle runs home to write his apologies. Afterward, Santa takes Karen home on his sleigh and brings Frosty back to the North Pole, keeping his promise to her that Frosty will return every year when Christmas snowfall comes around.
As the end credits roll, Frosty leads the town on another parade through town and Hinkle is seen with a new top hat as the title song is sung. At the end of the parade, Frosty climbs in the back of Santa's sleigh and says, "I'll be back on Christmas Day!"