Do flexible spending accounts require that employees use the money within the current year or lose it?

Flexible spending accounts (FSAs) are designed to encourage employees to set aside pre-tax dollars for certain eligible expenses, such as medical costs or dependent care. One of the key features of traditional FSAs is the "use it or lose it" policy. This means that any funds that are not used by the end of the plan year will be forfeited; therefore, employees need to spend their contributions within that specified timeframe.

The correct answer highlights this critical component of FSAs. It is important for participants to carefully estimate their potential eligible expenses for the year to maximize the use of their contributions. Employers may offer some limited options, such as a grace period or a small carryover amount, but these are not universal across all plans and can vary by employer. Understanding these terms helps employees make informed decisions about their benefits and financial planning for healthcare costs.