Takeaways
- Flexible Spending Accounts are funded with pre-tax money from your paycheck.
- FSAs use pre-tax funds to pay for medical and dependent care expenses.
- There are two types of FSAs: Healthcare and Dependent Care.
- Dependent Care FSAs can fund preschools, after-school programs, and nannies.
- Healthcare FSAs can cover costs like prescription drugs, insurance deductibles, and over-the-counter items.
Healthcare costs often catch us off guard and are a significant financial burden. This is where a Flexible Spending Account (FSA) comes in, offering much-needed relief. Many employers provide this tool to help employees save money on medical expenses. Here’s how it works.
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What Is a Flexible Spending Account?
A Flexible Spending Account is offered by employers and allows you to set aside pre-tax money to pay for certain out-of-pocket health care costs or dependent care. By deducting the funds from your paycheck before taxes, an FSA reduces your taxable income, which can save you money on taxes while simultaneously helping you manage medical expenses.
You must calculate how much you want to contribute from your paycheck to your FSA each year. Some employers even offer matching contributions. These contributions can pay for medical expenses, dental care, over-the-counter items, or vision care. If you have unused money in your account at the end of the year, you will lose those contributions if your employer doesn’t offer a carryover option.
Keeping your records straight with an FSA is extremely important, so keep track of your receipts and documentation. Most FSA accounts now come equipped with a debit card for easy tracking.
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How Flexible Spending Accounts Work
FSAs are typically offered as part of an employee benefits package. During open enrollment (usually once a year), employees can choose how much money to contribute to their FSA for the upcoming year, up to the annual IRS limit.
Here is how it works:
- Choose Your Contribution Amount - Decide how much you want to set aside. This amount will be divided across your pay periods and deducted pre-tax from each paycheck.
- Access Full Funds Early - The full annual amount becomes available on the first day of the plan year, even though you have not yet contributed all of it.
- Use for Qualified Expenses - Use your FSA debit card (if provided) or submit receipts for reimbursement on eligible expenses.
If you do not use all of your funds during the year, the amount is forfeited. A recent study showed that roughly 50% of FSA account holders forfeited funds to their employers.[1]
When You Need an FSA
An FSA can be the perfect financial savings product if you have predictable out-of-pocket medical expenses. You may benefit from a flexible spending account if you:
- Have regular prescriptions, therapy sessions, or doctor visits.
- Want to reduce your taxable income while preparing for medical costs.
- Expect to purchase health-related items like contact lenses, hearing aids, or braces.
- Or your dependents need vision or dental care.
Here’s What FSAs Can Pay For
FSA accounts are meant to give you a boost when it comes to saving money for medical expenses. Here’s what this highly flexible account allows you to pay for:
Healthcare FSA
You can use your healthcare FSA to pay for needed treatment, medical equipment, and other eligible expenses like:
- Cold and flu medicine
- Prescribed medicines
- Pregnancy tests
- Glasses
- Crutches
- Bandages
Each FSA plan has specific products it excludes; check your plan’s covered treatment for rules and documentation requirements.
Dependent Care FSA
Your FSA account covers work-related costs for your children (under 13 years old) or adult dependents. It can cover items like:
- Nursery school
- Preschool
- Nannies
- After-school programs
- Adult or senior day care
Dependent care funds cannot be used to fund non-work-related care, like tutoring or school tuition. Check your plan’s list of eligible expenses.
2025 FSA Limits
The IRS limits how much you can contribute to a flexible spending account each year. For 2025, the contribution limits are:
- Health Care FSA: Up to $3,300 per employee
- Dependent Care FSA: Up to $5,000 per household (or $2,500 if married filing separately)
If your employer offers a carryover option, you can roll over up to $660 of unused funds into the following year.[2] Otherwise, budget carefully and track your expenses to avoid forfeiting any money.
Read More: How to Choose Your Tax Filing Status
How to Use Your FSA
Using your FSA is straightforward. Here are several tips to get the most out of your account:
- Keep Records - Save all receipts and documentation for medical purchases, even if you use an FSA debit card. You may need to submit proof for certain transactions.
- Shop Smart - Many online retailers, such as FSAstore.com or major pharmacies, highlight items eligible for FSA purchases, such as first-aid kits, sunscreen, and digital thermometers.
- Plan for Annual Expenses - When choosing your contribution amount, consider your upcoming needs, such as eye exams, dental cleanings, or prescription renewals.
- Submit Claims Promptly - If your FSA plan requires manual reimbursement, be sure to submit receipts before the deadline.
- Use the Entire Balance - As the end of the year approaches, check your account balance and schedule appointments or stock up on qualified items to avoid losing unspent funds.
Calculate Your FSA Contribution
Choosing the right amount to contribute can feel tricky. Start by estimating your typical out-of-pocket medical expenses from the past year, then add any upcoming known costs.
For example:
Prescriptions: $50/month × 12 months = $600
Eye exam and glasses = $250
Dental check-ups = $300
Total estimated expenses = $1,150
In this case, contributing around $1,200 to your FSA would cover these expenses and reduce your taxable income by the same amount.
Remember: If you do not use all your funds, you may lose them unless your employer allows a grace period or carryover.
What Happens if You Quit?
If you leave your job before the end of the plan year, your FSA contributions stop. However, you can still use the funds for eligible expenses incurred before your termination date. Because FSAs are employer-owned, unused funds typically revert to the employer when you leave unless otherwise specified in your benefits plan.
FSA vs. HSA
FSAs and HSAs (Health Savings Accounts) are often confused, but they have key differences:
| Feature | FSA | HSA |
|---|---|---|
| Ownership | Employer | Employee |
| Rollover | Limited or none | Full balance rolls over |
| Portability | Not portable | Fully portable |
| Eligibility | Any employee with employer plan |
Must have a high-deductible health plan (HDHP) |
| Contribution Limit (2025) | $3,300 (individual) $6,600 (couple) |
$4,300 (individual) $8,550 (family) |
Smart Summary
A Flexible Spending Account allows employees to set aside pre-tax money to pay for eligible medical, dental, and vision expenses. It offers a practical way to reduce taxable income while planning ahead for healthcare costs. These accounts can provide meaningful tax savings but require careful planning due to “use-it-or-lose-it” rules. Consider consulting with a financial advisor about whether it makes sense to use an FSA or HSA for your healthcare savings.
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(1) Employee Benefit Research Institute. Vital Statistics on Flexible Spending Accounts, 2022: Forfeitures on the Rise. Last Accessed May 19, 2025.
(2) Internal Revenue Service. IRS: Healthcare FSA reminder: Employees can contribute up to $3,300 in 2025; must elect every year. Last Accessed May 19, 2025.
