How Much Does a Flexible Spending Account Save You?

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows individuals to set aside pre-tax money for eligible healthcare expenses. This arrangement provides a way to reduce out-of-pocket costs for medical, dental, and vision care. By contributing to an FSA, employees can effectively lower their taxable income, leading to potential savings on their annual tax obligations.

Understanding FSA Tax Advantages

Contributions to a Flexible Spending Account are deducted directly from an employee’s paycheck before taxes are calculated. This means FSA funds are not subject to federal income tax, Social Security tax, or Medicare tax. The exclusion of these funds from taxable income results in a lower overall taxable amount for the employee. This pre-tax payroll deduction directly reduces an individual’s adjusted gross income, decreasing their federal income tax liability. Additionally, the pre-tax nature of FSA contributions lowers the amount subject to Social Security and Medicare taxes, contributing to significant savings for participants.

Qualifying Expenses for FSA Savings

Flexible Spending Accounts cover healthcare products and services determined by the Internal Revenue Service. Eligible expenses include medical, dental, and vision care costs, such as doctor’s office visits, prescription medications, eyeglasses, contact lenses, and dental treatments. Beyond routine care, FSAs can also be used for certain medical devices, such as crutches, wheelchairs, and blood sugar test kits. Many over-the-counter medicines and health-related products, like pain relievers, cold medicines, and feminine hygiene products, are now eligible for reimbursement without requiring a doctor’s prescription. It is important to retain itemized receipts for all purchases, as the Internal Revenue Service may request documentation to verify expense eligibility.

Calculating Your Potential FSA Savings

Estimating potential FSA savings involves understanding your personal tax situation and anticipated healthcare costs. Individuals can calculate their approximate tax savings by multiplying their FSA contribution amount by their combined marginal tax rate, encompassing federal, state, and payroll taxes. For example, an individual contributing the maximum $3,300 to an FSA for the 2025 plan year, in a 22% federal income tax bracket, 5% state income tax bracket, and paying 7.65% in Social Security and Medicare taxes (FICA), would have a combined marginal tax rate of approximately 34.65%. Multiplying the $3,300 contribution by 34.65% yields an estimated annual tax savings of about $1,143.45. Actual savings will vary based on an individual’s specific income level, tax bracket, and applicable state and local tax rates.

FSA Contribution Limits and Other Considerations

The Internal Revenue Service sets annual contribution limits for Flexible Spending Accounts, which can be adjusted each year. For the 2025 plan year, the maximum amount an employee can contribute to a healthcare FSA is $3,300. This limit applies to employee contributions and does not typically include any employer contributions, which are separate.

A key rule associated with FSAs is the “use-it-or-lose-it” provision, meaning funds generally must be used by the end of the plan year or they are forfeited. To mitigate this, some employers offer either a grace period or a limited carryover option. A grace period allows an additional 2.5 months after the plan year ends to incur new eligible expenses and use remaining funds. Alternatively, some plans permit a carryover of a limited amount of unused funds into the next plan year, which for 2025 is up to $660. Employers can only choose to offer one of these options, not both, so it is important for participants to understand their specific plan’s rules.