When you don’t spend your full flexible spending account balance by the deadline, forfeited FSA money goes to your employer as the plan sponsor, not to the IRS or any other government agency. Your employer can’t hand it back to you personally, and under IRS proposed regulations they can only use it in a short list of ways tied to the FSA plan itself. Roughly $4.5 billion in FSA funds went unspent in 2023.
Who Keeps the Money
Once the forfeiture is final, the leftover balance stays with your employer. Depending on how the plan is structured, it sits inside the benefit plan’s assets or in the employer’s general accounts, but it never gets remitted to the IRS, the Department of Labor, or any other agency.
The one thing your employer is not allowed to do is give the money back to you specifically. Returning unused contributions to the individual who forfeited them would turn the FSA into a tax-free savings account and break the cafeteria plan rules under the Internal Revenue Code.1Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans Your FSA contributions skip federal income tax, Social Security, and Medicare on the way in, and the IRS treats the forfeiture risk as the price of that tax break.2Office of the Law Revision Counsel. 26 USC 3121 – Definitions Without a genuine chance of losing the money, the account would function like a tax-free savings vehicle Congress never authorized.
Employers can, separately, redistribute forfeited funds across all plan participants uniformly. That is not the same thing as returning your money to you, and the difference matters legally.
What the Employer Can Actually Do With It
IRS proposed regulations from 2007, which employers may rely on while final rules are pending, allow only a narrow set of uses for FSA forfeitures.
- Offset experience losses from participants who spent more than they contributed before leaving the plan.
- Pay plan administrative costs, such as fees to third-party administrators who handle claims, enrollment, and compliance, as long as the expenses relate to the FSA itself.
- Reduce the following year’s salary reductions for participants, applied on a reasonable and uniform basis.
- Distribute forfeited funds to current participants as a taxable payment, again on a reasonable and uniform basis. The allocation cannot be tied to any individual’s claims experience, so heavy spenders and light spenders get the same share.
- Increase the maximum annual coverage amount available to participants in the following plan year.
Most private-sector employer health plans are also governed by ERISA, which adds a further constraint. ERISA’s exclusive benefit rule requires plan assets to be used solely to provide benefits to participants. An employer running an ERISA-governed FSA cannot pocket the forfeitures as corporate revenue or roll them into general operating funds. Government employer plans and other ERISA-exempt plans have somewhat more flexibility, but the permitted uses still track the categories above.
Why Employers Are Allowed to Keep Forfeitures at All
The design isn’t a windfall. Health FSAs operate under the uniform coverage rule, which puts real money at risk for the employer.
Your full annual election has to be available for reimbursement on the first day of the plan year, even though your paycheck deductions spread across all 12 months. If you elect $3,400 for 2026, you can submit a $3,400 claim in January after contributing only a couple hundred dollars. If you then leave the company, your employer cannot claw back the difference.3IRS. Health FSA Uniform Coverage Rules
Forfeitures from employees who underspend help cover losses from employees who overspend and leave. The system pools risk across participants. If forfeitures didn’t flow back into the plan, many employers would run a net loss on their FSA program every year and stop offering the benefit.
Ways to Keep More of Your Money Before It’s Forfeited
The use-it-or-lose-it rule is strict, but your employer may offer one of two safety valves. These are optional, and a plan can include at most one of them.4HealthCare.gov. Using a Flexible Spending Account (FSA)
Carryover. Up to $680 of unused funds can roll from one plan year into the next for 2026. Anything above the cap is still forfeited. The carryover amount does not count against your next-year election, so you could have up to $4,080 available in 2026: a $680 carryover plus a fresh $3,400 election.5IRS. Revenue Procedure 2025-32
Grace period. Up to two and a half extra months after the plan year ends to incur new eligible expenses using last year’s balance. For a calendar-year plan, that runs through March 15. Anything left after the grace period is forfeited.
Many people lose money simply because they didn’t know which option their plan offered. That answer is in your summary plan description, and your benefits administrator can confirm it quickly.
Leaving Your Job Mid-Year
If you leave your employer partway through the plan year, you generally lose any unspent FSA balance as of your termination date. Claims for expenses you incurred while still employed can still be submitted during the plan’s run-out period, but new expenses after your termination date do not qualify.
COBRA continuation coverage can extend FSA access in limited situations. Your former employer typically has to offer COBRA for the health FSA only if the account is “underspent,” meaning the remaining benefit exceeds what you would pay in COBRA premiums for the rest of the year. If you’ve already spent more than you’ve contributed, the account is “overspent” and COBRA doesn’t have to be offered. Even when it is available, FSA COBRA coverage usually runs only through the end of the current plan year, not the 18 months that applies to medical insurance.
You would also be paying the contributions out of pocket, after tax, plus a 2% administrative fee. For most people, that only pencils out if you have large, predictable medical expenses coming before the plan year ends. Otherwise the balance becomes part of the forfeiture pool your former employer uses under the rules above.
How to Avoid Losing Your FSA Money in the First Place
The best defense is a realistic election. Estimate your likely out-of-pocket medical costs conservatively rather than electing the maximum because the tax break looks attractive. A $680 carryover cushion helps, but only if your plan offers carryover at all.
If you’re approaching year-end with a balance, eligible expenses are broader than most people realize. Prescription sunglasses, first-aid supplies, over-the-counter medications, and some dental and vision work all qualify. Stocking up on contact lens solution in December isn’t glamorous, but it beats adding to your employer’s forfeiture pool. Check your plan’s eligible expense list well before the deadline rather than the week of.
Know your specific plan rules. Whether you have a carryover, a grace period, or neither changes how much urgency you should feel at year-end, and how much of an unspent balance you can actually protect.