Flexible spending accounts (FSAs) allow workers to increase their nontaxable income by setting aside money for government-approved health and family uses. However, you forfeit any funds you contribute at work but don't spend each year, usually with a grace period from January through March. Any unused money reverts to your employer, who may use it to cover the costs of running the plan.
The Internal Revenue Service (IRS) doesn't require workers to forfeit unused FSA funds entirely. It only prevents you from getting back the exact amount you didn't spend. Employers have the discretion to redistribute any unused funds to their employees by dividing it equally among all participating workers. Employers can also divide the money based on each employee's level of participation in the plan.
Most employers retain unused funds to cover the plan's administrative costs, according to the American Federation of State, County and Municipal Employees (AFSCME) union. However, an employer can also use the tax savings generated by FSAs to cover such costs, the union says.
The expenses you can set aside money for in an FSA include prescription medications and many over-the-counter ones, co-pays, deductibles, eyeglasses or contact lenses, hearing devices, psychiatric expenses and even smoking-cessation classes.
When deciding how much to contribute to an FSA, consider what your health insurance doesn't pay for annual exams and dental work. Also look at other allowable expenses you expect your household to face during the year.