What happens to the unused funds in a Flexible Spending Account at the end of the plan year?

The correct answer highlights the common "use it or lose it" rule associated with Flexible Spending Accounts (FSAs). At the end of the plan year, any unused funds in an FSA are typically forfeited back to the employer unless the employer has implemented specific provisions that allow for a carryover of a limited amount or a grace period for spending the funds.

This provision is designed to encourage employees to carefully estimate their healthcare costs for the year, as the design of FSAs is to fund anticipated medical expenses. Employers may offer more flexible options, such as allowing a limited carryover (up to a certain dollar amount) or extending the plan year for a few months to allow employees to use their remaining funds. However, absent such accommodations, participants will lose any amounts they do not spend by the end of the plan year.

Understanding this aspect of FSAs is crucial for employees to manage their contributions effectively and maximize their benefits while minimizing the risk of losing unspent funds.