How Much Do You Save With a Flexible Spending Account?

Flexible Spending Accounts (FSAs) are employer-sponsored benefit programs designed to help individuals save money on out-of-pocket healthcare and dependent care expenses. These accounts allow participants to set aside pre-tax funds from their paycheck for eligible costs, effectively reducing their taxable income.

The Mechanics of FSA Tax Savings

An FSA generates tax savings by allowing contributions to be made before various taxes are calculated. Money allocated to an FSA is deducted from an employee’s gross pay before federal income tax, state income tax in most jurisdictions, and FICA taxes (Social Security and Medicare) are withheld. This pre-tax treatment immediately reduces the individual’s taxable income, leading to a lower tax liability.

Additionally, FICA taxes, totaling 7.65% (6.2% for Social Security and 1.45% for Medicare) for employees, are also avoided on FSA contributions, providing further savings. When funds are later withdrawn from the FSA for qualified expenses, these withdrawals are also tax-free, creating a compounding tax advantage. This dual benefit of untaxed contributions and untaxed withdrawals makes FSAs a financially advantageous tool for managing eligible expenses.

Types of FSAs and Eligible Expenses

Flexible Spending Accounts primarily come in two forms: Health Care FSAs and Dependent Care FSAs. A Health Care FSA (HCFSA) is dedicated to reimbursing eligible medical, dental, and vision expenses not covered by health insurance. Common eligible expenses include deductibles, co-payments, prescription medications, eyeglasses, contact lenses, and dental work. Over-the-counter medications and menstrual care products also qualify for reimbursement.

A Dependent Care FSA (DCFSA) is specifically for expenses related to the care of qualifying dependents, to allow the account holder and their spouse to work, seek employment, or attend school full-time. Eligible dependents typically include a qualifying child under the age of 13 or a spouse or dependent of any age who is physically or mentally incapable of self-care. Common expenses that can be reimbursed through a DCFSA include fees for daycare, preschool, after-school care, and summer day camps.

Contribution Limits and “Use It or Lose It”

The Internal Revenue Service (IRS) sets annual limits on contributions to FSAs. For 2025, the maximum amount an individual can contribute to a Health Care FSA is $3,300. The Dependent Care FSA limit for 2025 remains $5,000 for individuals or married couples filing jointly, and $2,500 for married individuals filing separately. It is important to note that a recent legislative change, the “One Big Beautiful Bill Act of 2025,” will increase the Dependent Care FSA limit to $7,500 ($3,750 for married filing separately) starting January 1, 2026.

A core rule governing FSAs is the “use it or lose it” principle, meaning that funds must be used by the end of the plan year or they are forfeited. Many employers offer exceptions to this rule. Some plans provide a grace period, typically up to 2.5 months after the plan year ends, during which participants can incur new expenses and use remaining funds. Other plans may allow a limited amount of unused funds to be carried over to the next plan year. For 2025, the maximum carryover amount for a Health Care FSA is $660.

Calculating Your Potential Savings

Understanding how to calculate potential savings with an FSA involves considering your tax bracket and the FICA tax rate. Since contributions reduce your taxable income, the savings are directly tied to your marginal tax rate and the fixed FICA rate.

Consider a single individual with a taxable income of $70,000 in 2025, who contributes the maximum $3,300 to a Health Care FSA. This individual would fall into the 22% federal income tax bracket for a portion of their income. By contributing $3,300 to an FSA, their federal taxable income is reduced by that amount. This results in an immediate federal income tax saving of $726 ($3,300 22%).

Additionally, the $3,300 contribution is exempt from FICA taxes. This adds another $252.45 in savings ($3,300 7.65%). Therefore, the total tax savings for this individual would be $978.45 ($726 federal income tax savings + $252.45 FICA tax savings). State income tax savings would further increase this amount, depending on the state’s tax rate.

For a family contributing the maximum $5,000 to a Dependent Care FSA in 2025, assuming a combined federal tax bracket of 24%, the federal income tax savings would be $1,200 ($5,000 24%). The FICA tax savings on this amount would be $382.50 ($5,000 7.65%). The combined federal tax savings for this family would total $1,582.50. Estimating annual eligible expenses and understanding your tax situation can help quantify the financial benefits of an FSA.