Like it or not if you did not use up all the FSA funds then not only can they be forfeited but the unused portion is added back into the wages and is taxed as if you never put it in the FSA at all.
The only good news is that the money put in the FSA account escaped FICA taxes as well and you do not need to pay them on the forfeited amount ... only the fed (and maybe state) taxes.
For instance ... if you set aside the max of $5000 in the FSA then that amount did not have the employee's share of the FICA taxes withheld which is $5000 x 7.65% = $382.50 of taxes saved on the W-2 ... but the $5000 has to be added back to the wages in box 1 which shows up on the form 1040 line 1.
