What happens to an employee's funds in a Flexible Spending Account upon termination of employment?

When an employee terminates their employment, the funds in a Flexible Spending Account (FSA) typically are forfeited. This is a key characteristic of FSAs; they are designed for use within a specific plan year and generally must be spent or incurred by the end of that year, with limited carryover options that vary by plan. If an employee does not use the funds while still employed and within the designated time frame, they lose those funds, hence the concept of forfeiture.

The structure of an FSA is such that it is intended for specific tax-advantaged spending on qualified medical expenses, and it does not allow for transfer to new employers or an indefinite retention of funds. If an employee moves to a new job, any remaining balance in their FSA does not follow them. Therefore, in the context of a termination of employment, the correct response emphasizes the forfeiture of unutilized funds in the account.