Should I Get a Flexible Spending Account (FSA)?

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows individuals to set aside pre-tax money for eligible out-of-pocket healthcare or dependent care expenses. The primary purpose of an FSA is to help participants save money on these costs by reducing their taxable income. Contributions are not subject to federal income, Social Security, or Medicare taxes, leading to tax savings. FSAs are offered as part of an employer’s benefits package during designated enrollment periods.

Understanding Different FSA Types

There are two primary types of Flexible Spending Accounts: Health FSAs and Dependent Care FSAs, each designed for specific expense categories. Health FSAs cover qualified medical, dental, and vision costs for the employee, their spouse, and eligible dependents. Common eligible expenses include copayments, deductibles, prescription medications, certain over-the-counter medications, and vision care like eyeglasses or contact lenses.

Dependent Care FSAs (DCFSAs) are for eligible childcare or adult dependent care expenses. These accounts benefit individuals who pay for the care of a qualifying child under age 13, or a spouse or dependent unable to care for themselves. Eligible expenses include daycare, preschool tuition, after-school programs, and elder care services, provided these are incurred to allow the account holder to work. Health FSA funds cannot be used for dependent care expenses, and DCFSA funds cannot be used for healthcare costs.

FSA Core Features

Flexible Spending Accounts offer tax advantages because contributions are made with pre-tax dollars, lowering an individual’s taxable income. Withdrawals are tax-free when used for qualified expenses. The IRS sets annual contribution limits, subject to periodic adjustments. For 2025, the maximum contribution for a Health FSA is $3,300. For a Dependent Care FSA, the maximum household contribution is $5,000, or $2,500 for married individuals filing separately.

A defining characteristic of FSAs is the “use-it-or-lose-it” rule, which requires any funds not used by the end of the plan year to be forfeited. Employers can offer exceptions for flexibility. One exception is a grace period, allowing participants an additional two and a half months after the plan year ends to incur eligible expenses. For example, a plan year ending December 31 would extend the spending deadline to March 15 of the following year.

Another exception is a carryover provision, where a limited amount of unused Health FSA funds can be carried over to the next plan year. For 2025, the maximum carryover for Health FSAs is $660. Employers have discretion, choosing to offer either a grace period or a carryover, but not both; some may offer neither.

Assessing Your Eligibility and Needs

Determining if an FSA is suitable begins by confirming if your employer offers this benefit, as FSAs are employer-sponsored plans. Assess your predictable eligible expenses for the upcoming year. Reviewing past medical bills, prescription costs, or childcare expenditures can provide a realistic estimate of anticipated out-of-pocket expenses.

For a Health FSA, consider if you anticipate regular medical appointments, ongoing prescriptions, or planned dental or vision procedures. Individuals enrolled in a high-deductible health plan (HDHP) who also contribute to a Health Savings Account (HSA) should note that a general-purpose Health FSA can disqualify HSA contributions. In such cases, a Limited Purpose FSA (LPFSA), which restricts eligible expenses to dental and vision care, might be an option, allowing simultaneous contributions to both an HSA and an LPFSA.

If you pay for childcare or adult dependent care, a Dependent Care FSA could be beneficial. Consider its interaction with the Child and Dependent Care Tax Credit. While both offer tax benefits, you cannot use the same expenses for both the FSA and the tax credit; FSA funds reduce the amount eligible for the credit. Utilize the DCFSA first as it reduces taxable income, then claim the tax credit for any additional qualifying expenses beyond the FSA contribution limit. Understanding your comfort level with the “use-it-or-lose-it” rule and accurately estimating your expenses helps maximize tax savings and avoid forfeiture.

Enrollment and Account Management

Enrollment in a Flexible Spending Account occurs during your employer’s annual open enrollment period, the designated time each year to select or modify employee benefits. You elect the specific annual contribution amount, which is then deducted from your paychecks in equal, pre-tax installments throughout the plan year.

Accessing FSA funds is straightforward, often through an FSA debit card provided by your plan administrator. This card can be used directly at the point of sale for eligible expenses. For expenses not covered by the card, or if a card is not provided, pay out-of-pocket and submit a claim for reimbursement, providing receipts and possibly an explanation of benefits (EOB) from your healthcare provider.

Keep all receipts, invoices, and supporting documentation for eligible expenses. These records substantiate claims and can be requested by your plan administrator or the IRS during an audit. FSA elections are irrevocable during the plan year; you cannot change your contribution amount unless you experience a qualifying life event, such as marriage, the birth of a child, or a change in employment status.