What Is A Flexible Spending Account (FSA)

A flexible spending account (FSA) is a tax-advantaged savings account that lets you set aside pre-tax dollars to pay for eligible healthcare or dependent care expenses. Unlike a health savings account (HSA), an FSA is employer-sponsored and owned, making it an attractive benefit for employees looking to reduce their taxable income while covering out-of-pocket costs.

An FSA makes the most sense if you have predictable healthcare or dependent care expenses, want to reduce your current taxable income and are comfortable with the “use it or lose it” requirement.

How does a flexible spending account work?

When you enroll in an FSA through your employer, you decide how much to contribute for the year during open enrollment. This amount is divided equally across your paychecks and deducted before taxes are calculated, reducing your overall taxable income.

Here’s how the process works:

• Enrollment: You choose your annual contribution amount during your employer’s open enrollment period, up to the federal limits.
• Funding: The selected amount is automatically deducted from each paycheck before taxes, providing immediate tax savings.
• Access: You can use FSA funds throughout the year for eligible expenses, even if you haven’t yet contributed the full amount.
• Reimbursement: Submit receipts for qualified expenses to receive reimbursement, or use an FSA debit card if your employer provides one.

According to the Federal FSA Program, participants save an average of 30 percent on healthcare expenses due to the tax advantages.

Types of flexible spending accounts

There are two main types of FSAs, each designed for different categories of expenses:

Healthcare FSA (HCFSA)

A healthcare FSA covers medical, dental and vision expenses that aren’t paid by your insurance plan. This includes:

• Prescription medications and over-the-counter medicines (with a prescription)
• Dental cleanings and treatments
• Vision exams and prescription glasses or contacts
• Physical therapy and medical equipment
• Bandages, pregnancy test kits and other medical supplies

Important: You cannot use healthcare FSA funds for insurance premiums — only out-of-pocket expenses qualify.

Dependent Care FSA (DCFSA)

A dependent care FSA helps cover expenses for caring for children under 13 or adult dependents who cannot care for themselves. Eligible expenses include:

• Daycare and preschool costs
• Before and after-school care
• Summer day camps (but not overnight camps)
• Adult day care for qualifying dependents
• Babysitting expenses that allow you to work

For a complete list of eligible expenses, visit the IRS FSA eligibility guidelines.

It’s also possible to spend more than what’s currently available in the FSA to cover expenses, as long as the set contributions add up to those expenses by the end of the year.

Employers may also make contributions to an employee’s FSA, up to the annual contribution limit, though they aren’t required to.

FSA contribution limits for 2025

Healthcare FSA: You can contribute up to $3,300 annually. If you’re married, your spouse can also contribute up to $3,300 to their own FSA.

Dependent Care FSA: The maximum contribution is $5,000 per year for individuals or married couples filing jointly.

Employer contributions count toward these limits, though employers aren’t required to contribute to your FSA.

What happens to unused FSA money?

FSAs operate on a “use it or lose it” basis, meaning any unused funds are typically forfeited at year-end. However, some employers offer flexibility through:

• Grace period: Up to 2.5 additional months to use remaining funds
• Carryover option: Up to $660 of unused healthcare FSA funds can roll over to the next plan year

Check with your HR department to understand your employer’s specific FSA policies.

FSA vs HSA: Key differences

While both accounts offer tax advantages for healthcare expenses, they differ significantly:

Learn more about the differences between an HSAs and FSAs.

Can you have both an FSA and HSA?

Generally, you cannot have both a healthcare FSA and HSA simultaneously. The exception is a limited-purpose FSA, which only covers dental and vision expenses and can complement an HSA.

This combination works well if you anticipate significant dental or vision costs that might exceed your HSA balance, allowing you to pay for these expenses even before you’ve fully funded your HSA.

Pros

• FSA contributions reduce your taxable income and aren’t subject to payroll taxes, providing immediate savings.
• You can use your full annual FSA allocation immediately, even if you haven’t contributed the entire amount yet.
• Some employers contribute to employee FSAs, though this isn’t required.
• Regular payroll deductions help you budget for healthcare expenses throughout the year.

Cons

• Unused funds are typically forfeited at year-end, requiring careful planning.
• FSA funds can’t be invested and don’t earn interest.
• You forfeit FSA funds if you leave your employer, since the account isn’t portable.
• You must decide your contribution amount during open enrollment and generally can’t change it mid-year.

Bottom line

A flexible spending account can be a valuable tool for managing healthcare and dependent care costs while reducing your tax burden. The key is accurately estimating your annual expenses to maximize benefits without forfeiting unused funds.

If you prefer more flexibility and investment options, consider whether you qualify for an HSA instead. For those with predictable expenses and the discipline to use funds within the plan year, an FSA offers immediate tax savings and convenient expense management.