Should I Get a Flexible Spending Account (FSA)?

Flexible Spending Accounts (FSAs) offer a way for individuals to manage out-of-pocket expenses with tax advantages. An FSA is an employer-sponsored benefit allowing you to set aside pre-tax money from your paycheck for eligible health care or dependent care costs. This reduces your taxable income, potentially leading to savings on federal income, Social Security, and Medicare taxes. Understanding how FSAs operate is key to maximizing their benefits.

Flexible Spending Account Fundamentals

An FSA enables employees to allocate pre-tax funds from their earnings for eligible expenses. This reduces the amount of income subject to various taxes, effectively lowering your overall taxable income.

There are two types of FSAs: Health Care FSAs (HCFSA) and Dependent Care FSAs (DCFSA). A Health Care FSA covers qualified medical, dental, and vision expenses for you, your spouse, and eligible dependents. Dependent Care FSAs are for expenses related to the care of qualifying dependents, such as children under age 13, to enable the account holder to work or look for work. Both types are funded through payroll deductions.

Eligible Expenses and Claiming Funds

Health Care FSAs cover a broad range of qualified medical, dental, and vision expenses. Examples include co-payments, deductibles, prescription medications, eyeglasses, contact lenses, and dental work. Over-the-counter medicines and certain medical supplies are also eligible. For a comprehensive list of eligible medical expenses, consult IRS Publication 502.

Dependent Care FSAs are for expenses that allow you and your spouse to work or seek employment. Eligible expenses include costs for daycare, preschool, and before- and after-school programs for children under 13. Care for a disabled spouse or an older dependent who is physically or mentally incapable of self-care may also qualify if claimed as a dependent on your federal income tax return.

Claiming funds from an FSA involves submitting documentation, such as receipts, to your FSA administrator for reimbursement. Many plans offer direct deposit or a dedicated debit card for eligible purchases. Retain all receipts and supporting documentation, as the IRS requires proof of eligibility for all submitted expenses.

Important Account Rules and Features

Flexible Spending Accounts are subject to annual contribution limits set by the IRS, which vary by type and are adjusted for inflation. For Health Care FSAs, the maximum employee contribution for 2025 is $3,300. If both spouses have access to an FSA, each can contribute up to this maximum to their respective plans. For Dependent Care FSAs, the maximum contribution limit for 2025 is $5,000 per household, or $2,500 for married individuals filing separately.

A defining characteristic of FSAs is the “use it or lose it” rule, meaning any funds not used by the end of the plan year are forfeited. To mitigate this, employers offer one of two exceptions: a grace period or a carryover option, but not both. A grace period provides an additional 2.5 months after the plan year ends to incur new eligible expenses. Alternatively, the carryover option allows a limited amount of unused Health Care FSA funds to be rolled over into the next plan year; for 2025, this maximum carryover amount is $660. This carryover does not reduce the maximum amount an employee can elect to contribute in the new plan year.

Assessing Your Personal Financial Situation

Deciding whether an FSA is suitable involves estimating your anticipated eligible expenses for the upcoming year. Review past medical, dental, vision, or dependent care costs to forecast future needs. Consider any planned procedures, regular prescriptions, or predictable childcare expenses.

Assess your current health coverage, especially if you have a high-deductible health plan (HDHP) paired with a Health Savings Account (HSA). Standard Health Care FSAs cannot be held concurrently with an HSA due to IRS rules. However, a Limited-Purpose FSA (LPFSA) is compatible with an HSA, allowing pre-tax funds for eligible dental and vision expenses while preserving your HSA for other medical costs or long-term savings. Evaluate your comfort with the “use it or lose it” rule, even with grace period or carryover provisions. This involves comparing estimated expenses against contribution limits and considering the risk of forfeiting unused funds if actual expenses are lower than anticipated.

Enrollment and Ongoing Account Administration

Enrollment in a Flexible Spending Account occurs during your employer’s annual open enrollment period. This is when you elect to participate, choose the FSA type, and decide your annual contribution amount. If you experience a qualifying life event, such as marriage, divorce, birth or adoption of a child, or a change in employment status, you may be able to enroll or adjust contributions outside of open enrollment.

The enrollment process involves completing forms provided by your employer or making elections through an online benefits portal. Specify the amount you wish to contribute for the plan year, which will be deducted from your paychecks in equal installments. Once enrolled, ongoing account administration includes monitoring your balance, submitting claims for reimbursement, and retaining records of all eligible expenses and payments.