What happens to the money you don't use in your FSA?

MINNEAPOLIS -- Doctor's appointments, childcare, Tylenol, braces -- it all adds up.  Millions of Americans use a flex spending account (FSA) to pay for these expenses. Most often, these accounts are use-it-or-lose-it.

So, what happens when you don't spend all your FSA money? Good Question.

"Typically the money goes back to the employer," says Jake Spiegel is Research Associate, Health and Wealth with the Employee Benefit Research Institute (EBRI).

IRS rules stipulate that employers can only use that money for limited purposes, like offsetting administrative costs of the FSA plan or reducing the plan's cost for the following year.

"They are very specific ways that employers can use this money," said Spiegel.  "They can't use as slush fund for pizza parties and bonuses."

Flex spending accounts are pre-tax accounts that can be used to pay healthcare or dependent care costs. Employees decide in advance how much money to contribute each year, but according to EBRI's FSA database, 44% of people leave money on the table. The average amount is $370.

"There are benefits to it," said Nicky Brown, Vice-President of Public Policy and Government Affairs at HealthEquity, one of the nation's largest employee benefits administrator. "It's important to truly understand the plan and truly understand the deadline."

Some plans will offer an extension of 2.5 months to give people up until March 15 of the following year to spend the money. According to EBRI's database, 36% of plans give a grace period, 42% let people rollover a certain amount and 23% lose it at the end of the year.

As for why the unused money can't go back to the employee who contributed, Brown says that's part of restrictions that come with tax-free money that's available up-front. She also points out that even people who leave behind a small amount might still come out ahead with the savings from the tax-free account.

For a list of eligible expenses, visit the IRS website.