What Are the 2 Types of Flexible Spending Accounts?

Flexible Spending Accounts, commonly known as FSAs, are employer-sponsored benefit plans designed to help individuals manage certain out-of-pocket expenses with pre-tax money. Employees can elect to set aside a portion of their salary into these accounts, which is then exempt from federal income tax, Social Security, and Medicare taxes. This tax advantage reduces an individual’s taxable income, providing a way to save money on qualifying healthcare or dependent care costs. FSAs offer a structured approach to budgeting for predictable expenses while enjoying tax benefits.

Health Care Flexible Spending Accounts

A Health Care Flexible Spending Account (HCFSA) allows individuals to set aside funds specifically for eligible medical expenses incurred by the employee, their spouse, and qualified dependents. These accounts cover a broad range of healthcare costs, including deductibles, co-payments, prescription medications, and various dental and vision services. Examples of eligible expenses also extend to over-the-counter medications and certain medical equipment, provided they meet IRS guidelines. The Internal Revenue Service (IRS) sets annual contribution limits, which for 2025, allow up to $3,300.

The full elected amount in an HCFSA is typically available for use at the beginning of the plan year, even if not fully contributed yet. This immediate access to funds can be particularly beneficial for managing large, unexpected medical costs early in the year. Unlike Health Savings Accounts (HSAs), which require enrollment in a high-deductible health plan, HCFSAs are available to employees regardless of their health insurance plan type.

Dependent Care Flexible Spending Accounts

A Dependent Care Flexible Spending Account (DCFSA) is designed to help individuals pay for eligible dependent care expenses to enable the employee (and spouse) to work or attend school. Eligible expenses generally include costs for the care of a qualifying child under the age of 13, or for a spouse or dependent who is physically or mentally incapable of self-care and lives with the employee for more than half the year. Common examples include fees for daycare, nursery school, preschool, before- and after-school programs, and summer day camp.

Contributions to a DCFSA are made through pre-tax payroll deductions, providing a tax benefit. However, funds in a DCFSA typically become available as they are contributed, rather than the full amount being accessible upfront at the start of the plan year. Annual contribution limits are set on a household basis, which for 2025, is $5,000 for single filers or married couples filing jointly, and $2,500 for married individuals filing separately. Individuals generally cannot claim both DCFSA reimbursements and the Child and Dependent Care Tax Credit for the same expenses.

Key Operational Aspects

Flexible Spending Accounts are employer-sponsored benefits, meaning participation is contingent upon an employer offering such a plan; self-employed individuals, for instance, are not eligible. A fundamental rule governing FSAs is the “use it or lose it” provision, which mandates that funds generally must be used for eligible expenses by the end of the plan year, or any remaining balance is forfeited. Employers may, however, offer certain exceptions to this rule to provide more flexibility.

Two common exceptions employers might offer include a grace period or a carryover option, but typically not both. A grace period allows participants an additional limited time, often up to 2.5 months, into the new plan year to incur new expenses and use previous year’s funds. Alternatively, a carryover provision permits a limited amount of unused HCFSA funds, up to $660 for 2025, to roll over into the next plan year.

Accessing funds from an FSA typically involves either using a dedicated debit card, common for HCFSAs, or submitting claims for reimbursement with proper documentation, such as itemized receipts. Maintaining accurate records of all expenses is important, as the IRS may request documentation to verify eligibility. FSAs are generally not portable; if an employee leaves their job, any unused funds are typically forfeited. Enrollment in an FSA usually occurs during the annual open enrollment period offered by the employer.