3518 / How are gains or income from a flexible spending arrangement treated?

The maximum amount of reimbursement for a period of coverage under an FSA may not be substantially in excess of the total “premium” for the coverage. The maximum amount of reimbursement is not considered to be substantially in excess of the total premium if the maximum amount is less than 500 percent of the premium. This definition is applicable to plan years beginning after December 31, 1989.²

Since 2013, there are two possible plan options for a participant with unspent funds in a health FSA. The plan may (1) allow for a carryover of up to $500 to the next year, but forfeit amounts in excess of $500 ($660 in 2025, $640 in 2024 and $610 in 2023) at year end; or (2) allow for a grace period giving participants up to an additional 2½ months (through March 15) to spend the unused funds, but forfeit any remaining at the end of the grace period. The employer can offer either option, but not both. Or it can offer neither option resulting in forfeiture of all unspent funds at end of year.

1. Prop. Treas. Reg. § 1.125-5(o).