What happens to unused amounts in an FSA after the plan year ends?

When dealing with an FSA, or Flexible Spending Account, it's important to understand the rules surrounding unused funds at the end of the plan year. Typically, any unused amounts in an FSA are subject to a "use-it-or-lose-it" policy. This means that if you do not use your FSA funds within the specified plan year, those funds are forfeited after a grace period, if applicable. The IRS allows for a grace period of up to 2.5 additional months for spending these funds, but once that period ends, any remaining balance is lost.

This policy is designed to encourage employees to estimate their healthcare costs accurately and spend the funds within the given timeframe. Unlike some other accounts, such as HRAs (Health Reimbursement Arrangements), FSAs do not allow for indefinite rollover of funds, nor do they provide refunds or automatic transfers of unused balances. Therefore, the correct understanding of what happens to unused amounts in an FSA after the plan year ends centers on this principle of forfeiture if the funds are not used in time.