What typically happens to unspent funds in a Flexible Spending Account?

In a Flexible Spending Account (FSA), unspent funds usually revert back to the employer. This is a fundamental characteristic of FSAs, which are designed to allow employees to set aside pre-tax dollars for eligible healthcare or dependent care expenses. Since the funds in an FSA are provided by the employer and typically must be used within the plan year or a specified grace period, any leftover funds after this period do not carry over to future years.

This "use-it-or-lose-it" rule establishes that unspent amounts are ultimately returned to the employer, allowing them to manage budgetary considerations more effectively. This is in contrast to Health Savings Accounts (HSAs) where unspent balances can roll over indefinitely from year to year, offering a distinct financial incentive for those accounts. Understanding this mechanism encourages better planning for an FSA, as employees must be more strategic about their anticipated healthcare expenses within the given time frame.