Can You Get a Flexible Spending Account Outside of Work?

Flexible Spending Accounts (FSAs) offer a tax-advantaged way to pay for certain out-of-pocket expenses. Many individuals wonder if they can establish an FSA independently to manage healthcare or dependent care costs. This article clarifies whether FSAs are accessible outside of an employer-sponsored plan and discusses available alternatives.

Understanding Flexible Spending Accounts

An FSA is a special account established by an employer that allows employees to contribute a portion of their pre-tax earnings to cover eligible healthcare or dependent care expenses. Contributions are deducted from an employee’s paycheck before taxes are calculated, which can reduce their taxable income. There are primarily two types of FSAs: Health FSAs and Dependent Care FSAs, each designed for specific categories of expenses.

A Health FSA covers qualified medical, dental, and vision expenses for the employee, their spouse, and dependents, including deductibles, co-payments, and prescription medications. A Dependent Care FSA is used for expenses related to the care of a qualifying child under age 13 or a disabled spouse/dependent, enabling the account holder to work. A common characteristic of most FSAs is the “use-it-or-lose-it” rule, meaning funds not spent by the end of the plan year are generally forfeited.

The Employer Sponsorship Requirement

Flexible Spending Accounts are exclusively employer-sponsored benefits; an individual cannot establish or contribute to an FSA independently. These accounts are regulated by the Internal Revenue Service (IRS) under Section 125 of the Internal Revenue Code.

The employer sponsorship requirement stems from the administrative complexities and compliance obligations associated with managing FSAs. Employers bear the responsibility for administering the plan, ensuring compliance with IRS rules, and managing the pre-tax contributions. This structure allows the tax advantages to be realized through payroll deductions, directly linking the benefit to employment compensation.

Alternatives for Healthcare and Dependent Care Expenses

For individuals without access to an employer-sponsored FSA, several other tax-advantaged options exist to help manage healthcare and dependent care costs. One alternative for healthcare expenses is a Health Savings Account (HSA), which requires enrollment in a high-deductible health plan (HDHP) to be eligible. HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and qualified withdrawals are tax-free. Unlike FSAs, HSA funds roll over year to year and are owned by the individual, making them a portable savings vehicle.

Another option for managing dependent care costs is the Child and Dependent Care Credit, a non-refundable tax credit available to taxpayers who pay for childcare to enable them to work. The credit amount is a percentage of qualifying expenses, with the percentage varying based on the taxpayer’s adjusted gross income. While not a direct savings account, this credit can significantly reduce an individual’s tax liability. Some individuals may also deduct medical expenses that exceed a certain percentage of their adjusted gross income if they itemize deductions on their tax return.

Comparing FSAs to Alternatives

A key distinction between FSAs and alternatives like HSAs lies in their sponsorship and ownership. FSAs are employer-sponsored, while HSAs are individual accounts that remain with the account holder regardless of employment status. This difference also impacts the rollover of funds; FSAs typically have a “use-it-or-lose-it” provision, whereas HSA funds roll over indefinitely and can be invested.

The Child and Dependent Care Credit is a tax credit applied directly to an individual’s tax return, rather than an upfront savings account. HSAs require enrollment in a high-deductible health plan (HDHP), which is another eligibility difference from FSAs.