What is a Flexible Spending Account (FSA)? #
A Flexible Spending Account (FSA) is an employer-sponsored account that lets you set aside pre-tax money from your paycheck to use on eligible expenses.
The two most common types are Health Care FSAs (for medical-related expenses) and Dependent Care FSAs (for childcare or dependent adult care expenses). FSAs are sometimes called “flexible spending arrangements.” They can save you money on taxes by using pre-tax dollars for costs you would have paid anyway with after-tax money.
Eligibility #
FSAs are available only if offered by your employer as part of your benefits; self-employed individuals generally cannot have an FSA.
You don’t need to be enrolled in a specific health insurance plan to have a general Health Care FSA – any benefits-eligible employee whose company offers an FSA can participate. (However, note that if you are enrolled in an HSA, you typically cannot enroll in a full Health Care FSA at the same time, because IRS rules prevent dual use. You might be offered a limited-purpose FSA in that case, which we’ll touch on later.) Dependent Care FSAs are also employer-dependent and subject to IRS rules.
How It Works #
An FSA is funded by setting aside a portion of your paycheck before taxes are taken out.
You decide during your open enrollment period how much to contribute for the year (up to the IRS limit). That annual election is then deducted in equal installments from your pay throughout the year.
The key benefit is FSA dollars are never taxed
This gives you an immediate discount on your expenses equal to your tax rate. Depending on your employer’s plan, they may also contribute to your FSA (though this is less common, or might be a modest amount).
Notably, for a Health Care FSA, the full year’s elected amount is available to you from day one of the plan year – even though you haven’t paid in all that money yet.
For example, if you elect $1,200 for the year, you can use the entire $1,200 for an eligible expense in January, and then you “pay it back” via paycheck deductions over the rest of the year. (Dependent Care FSAs work differently: funds are only available as they are contributed each pay period.)
Using FSA Funds #
Health Care FSA funds can be used for qualified medical expenses very similar to HSA-eligible expenses: doctor copays, health insurance deductibles, prescriptions, dental care, vision care (glasses, contacts), medical supplies, wellness services and products, many over-the-counter medicines, menstrual products, and more.
Essentially, any health expenses that would qualify as deductible medical expenses under IRS rules (IRC Section 213(d)) are FSA-eligible, with the exception of insurance premiums. You can use your FSA to pay for your own expenses, or those of your spouse or dependents. Typically, FSAs offer a debit card for convenience, or you can submit receipts for reimbursement through your FSA administrator. You must keep receipts/documentation as proof that purchases were eligible, in case the administrator or IRS needs to verify them.
Tax Benefits #
With an FSA, contributions are pre-tax
This means you do not pay federal income or payroll taxes on the money you put in. This saves you roughly 20% to 40% on each dollar (depending on your tax bracket) compared to paying out-of-pocket with after-tax money.
Withdrawals are tax-free as well, as long as they are for eligible expenses. In other words, an FSA effectively gives you a discount on medical or dependent care costs equal to the taxes you would have paid on that income. Example: if you put $2,000 into a health FSA and you’re in a 22% federal tax bracket, you save about $440 in taxes that year.
Contribution Limits #
The IRS sets a limit on how much you can contribute to an FSA each year (adjusted annually for inflation). For a Health Care FSA, the limit for 2025 is $3,300 per employee (up from $3,050 in 2024).
If you’re married and both spouses have separate FSA plans at work, each can contribute up to the max (so a couple could set aside up to $6,600 total if both employers offer FSAs).
Dependent Care FSA contributions are capped by law at $5,000 per household per year (or $2,500 if married filing taxes separately). Important: These limits apply to contributions; they don’t limit how much your employer can reimburse you if you have valid claims (the reimbursement is naturally limited by what you contributed and any employer seed money).
“Use-It-or-Lose-It” and Rollover Rules #
One of the biggest differences between FSAs and HSAs is that FSAs are generally subject to a “use it or lose it” rule.
Funds in an FSA typically must be used within the plan year, or else you forfeit the leftover money. However, employers have options (per IRS rules) to alleviate this a bit: they can offer either a grace period of up to 2.5 months into the next year to spend remaining funds, or allow a carryover of a limited dollar amount to the next plan year. They cannot offer both options, and they also don’t have to offer either – it’s up to the employer’s plan design. If a carryover is offered, the IRS set the maximum carryover at $660 that can be carried from 2024 into 2025. Any unused amount above that is forfeited. If a grace period is offered instead, typically you might have until mid-March of the next year to use the leftover before losing it.
With an FSA, you need to plan your contributions and spending carefully so you don’t lose money. Assume any unspent FSA money by the deadline will be lost (forfeited to your employer).
Portability #
Unlike an HSA, an FSA is owned by the employer.
If you leave your job during the year, your FSA generally ends. You can only use remaining funds for expenses incurred while you were employed (some plans offer a short runoff period to submit claims for expenses before your termination date). Any unspent money typically reverts to the employer. In some cases, you might have the option to continue a health FSA through COBRA (paying after-tax to keep access for the rest of the year), but this is not common in practice. So, FSAs are not portable – they do not move with you to a new job.
FSAs are truly “use-it-or-lose-it,” so always spend the balance of your FSA before you leave a job, or before the end of the plan year.
If you’re planning to leave your job before the end of your FSA plan year, keep in mind that the total amount you’ve elected for your Flexible Spending Account (FSA) is available immediately at the start of the plan year. Although your contributions are deducted gradually from your paychecks throughout the year, you have access to the entire balance from the beginning.
Therefore, if you anticipate leaving your job before contributing the full amount to your FSA, it’s beneficial to spend as much of your available balance as possible before your account is terminated. Doing so allows you to maximize your healthcare and wellness benefits, effectively turning your FSA funds into “free money.” Consider using these funds for eligible expenses like eyeglasses, pre-paying for wellness appointments or packages, and purchasing approved over-the-counter and wellness products.
Summary #
FSA is a useful short-term, tax-saving account for predictable expenses. It’s best for those who want to save on this year’s taxes for known medical or child care costs. You get an immediate tax break, but you need to be mindful of the use-it-or-lose-it rule. FSAs work well if you can accurately forecast things like annual medical copays, orthodontics payments, daycare tuition, etc., and thus set aside the right amount of money to cover them with pre-tax dollars.
Sure! Here’s a comprehensive guide to Dependent Care Flexible Spending Accounts (Dependent FSAs or DCFSA). This guide is written in clear, practical language and is ideal for use in educational content, onboarding materials, or personal financial planning.