Flexible spending account (FSA) “forfeitures” are the leftover monies at the end of a plan year. If there are ten employees in a plan who collectively elect $10,000, and only $8,000 in claims are paid out when the books are closed on the plan year, there is a total forfeiture of $2,000. 

That money could, for instance, be used to pay claims for the next plan year’s participants’ claims, to defray plan administrative expenses (such as the monthly fees charged by Ameriflex), or provide “seed money” to future plan year FSAs (on a uniform basis). The most important thing to remember is that FSAs are subject to ERISA, and the forfeitures must therefore (at least in cases where the plan sponsor is subject to ERISA) be used in some fashion for the “exclusive benefit” of the participants in the plan.

It is generally permissible, especially in cases where the plan is being terminated, to “cash out” the forfeitures on a reasonable and consistent basis to participants. If done, this cash-out should be treated as taxable income to the recipients.