What Is a Flex Plan and How Does It Work for You?

Many employers offer benefit programs that allow individuals to manage their healthcare expenses efficiently. These arrangements, often referred to as “flex plans,” are employer-sponsored financial tools designed to help employees pay for out-of-pocket medical costs in a tax-advantaged way. They provide a structured approach to saving and spending money on health-related needs, and can significantly reduce an individual’s taxable income.

Flexible Spending Accounts

A Flexible Spending Account (FSA) is an employer-sponsored account where employees can set aside pre-tax dollars from their paycheck. These funds are specifically designated to pay for eligible out-of-pocket healthcare expenses. Common eligible expenses include deductibles, co-payments, prescription medications, as well as vision and dental care costs. For 2025, the annual contribution limit for an FSA is $3,300.

FSAs operate on an annual plan year, and funds must be used within that year, a rule often called “use-it-or-lose-it.” However, employers may offer exceptions. One common exception is a grace period of up to two and a half months after the plan year ends, allowing additional time to incur expenses. Alternatively, some employers permit a limited carryover of unused funds into the next plan year; for 2025, this carryover limit is $660. If an employee leaves their job, the funds generally do not follow them and remain with the employer.

Health Savings Accounts

A Health Savings Account (HSA) is a personal savings account designed for individuals enrolled in a High Deductible Health Plan (HDHP). This type of health insurance plan is a prerequisite for opening and contributing to an HSA. Contributions can come from the employee, the employer, or both, and are made with pre-tax dollars.

HSA funds can be used for a wide range of qualified medical expenses, including deductibles, co-payments, and prescription drugs. A key feature of HSAs is the ability to invest the funds, allowing them to grow over time. Unlike FSAs, HSA funds roll over year-to-year without limit and are owned by the individual, making them portable even if employment changes. For 2025, the annual contribution limits are $4,300 for self-only HDHP coverage and $8,550 for family HDHP coverage, with an additional $1,000 catch-up contribution permitted for those aged 55 or older.

Health Reimbursement Arrangements

A Health Reimbursement Arrangement (HRA) is an employer-funded account used to reimburse employees for eligible medical expenses. Unlike FSAs and HSAs, only the employer contributes funds to an HRA; employees cannot make contributions. The employer also owns the account and sets the rules for how the funds can be used, including which expenses are eligible for reimbursement.

Eligible expenses for HRA reimbursement include co-payments, deductibles, and certain medical, dental, and vision costs. Funds in an HRA generally roll over from year to year, but this is at the employer’s discretion. Because the employer owns the HRA, the funds are not portable and cannot be taken by the employee if they leave the company.

How Flex Plans Provide Tax Savings

Flexible spending accounts, health savings accounts, and health reimbursement arrangements offer tax advantages for managing healthcare costs. Contributions made to FSAs and HSAs are pre-tax, reducing an individual’s taxable income. This pre-tax treatment lowers the amount of income subject to federal income tax, Social Security tax, and Medicare tax.

For HSAs, the tax benefits extend further, often called a “triple tax advantage.” Contributions are tax-deductible or pre-tax, and any earnings from invested HSA funds grow tax-free. When funds from any of these accounts are used for qualified medical expenses, the withdrawals are also tax-free. This combination of pre-tax contributions, tax-free growth (for HSAs), and tax-free withdrawals for eligible expenses helps reduce the overall cost of healthcare.