What does the "use-or-lose" rule in flexible spending accounts refer to?

The "use-or-lose" rule in flexible spending accounts (FSAs) refers to the requirement that the funds contributed to the account must be used within the calendar year. This means that if the funds are not utilized for eligible expenses by the end of the plan year, they are forfeited. This rule encourages participants to plan their healthcare spending ahead of time and utilize their FSA funds effectively within the designated period.

The options regarding carrying over funds indefinitely or the ability to use funds for any purchase do not align with the specific nature of FSAs. Additionally, the idea that unused funds are automatically donated misrepresents the intended use of the funds within these accounts. Understanding this rule is crucial for managing an FSA effectively, as it directly impacts how account holders plan their healthcare expenses throughout the year.