What Is a Health Care Flexible Spending Account (HCFSA)?

A Health Care Flexible Spending Account (HCFSA) provides employees with a tax-advantaged way to manage healthcare costs. This employer-sponsored benefit allows individuals to set aside pre-tax money from their paycheck to cover eligible medical, dental, and vision expenses. By participating in an HCFSA, employees can reduce their taxable income, potentially leading to notable savings on federal income, Social Security, and Medicare taxes.

Understanding Health Care FSAs

A Health Care Flexible Spending Account is designed to help individuals save money on out-of-pocket medical, dental, and vision expenses. These accounts are exclusively offered through an employer’s benefits program. Employees enroll in the program through their workplace.

Contributions to an HCFSA are deducted directly from an employee’s gross pay before taxes are calculated. This pre-tax arrangement reduces the employee’s taxable income. A distinctive feature of an HCFSA is that the full annual amount elected by the employee is typically available for use at the beginning of the plan year, regardless of how much has been contributed through paycheck deductions up to that point. This “uniform coverage” rule allows individuals to cover significant medical expenses early in the plan year, even if they have not yet fully funded their account.

Contributing to and Using Your HCFSA

Employees typically elect their annual contribution amount for an HCFSA during their employer’s open enrollment period. This election is generally irrevocable for the duration of the plan year unless a qualifying life event, such as a change in marital status or the birth of a child, occurs. The Internal Revenue Service (IRS) sets annual contribution limits, which are adjusted periodically for inflation; for plan years beginning in 2025, the maximum employee contribution is $3,300. An employer may set a lower limit, but it cannot exceed the IRS maximum.

HCFSA funds can be used for a wide range of qualified medical expenses, which are defined by the IRS. Common eligible expenses include deductibles, co-payments, and coinsurance for medical, dental, and vision plans. Prescription medications, eyeglasses, contact lenses, dental work like orthodontia, and certain over-the-counter medications are also typically covered. However, expenses must be for medical care and not for cosmetic purposes or general health that lacks a medical necessity.

There are two primary methods for using HCFSA funds. Many plans provide an FSA debit card, which can be used directly at the point of sale for eligible expenses. For expenses paid out-of-pocket, employees can submit a claim to their plan administrator for reimbursement. This process requires providing proper documentation.

Essential HCFSA Rules and Considerations

A fundamental rule governing HCFSAs is the “use-it-or-lose-it” provision, which generally dictates that any funds not used by the end of the plan year are forfeited. To mitigate this, employers have the option to offer certain extensions. One common extension is a grace period, which allows employees an additional 2.5 months after the plan year ends to incur and use HCFSA funds.

Alternatively, some employers offer a carryover option, permitting a limited amount of unused funds to be rolled over into the next plan year. For plan years beginning in 2025, the maximum carryover amount is $660. Employers typically choose to implement either a grace period or a carryover, but not both. It is important for employees to understand their specific plan’s rules to avoid forfeiture of funds.

If an employee changes jobs or leaves employment, the HCFSA is generally terminated, and any unused funds are forfeited. Unlike some other health savings accounts, HCFSAs are not portable. While COBRA continuation for an HCFSA is sometimes an option, it is less common and often involves after-tax contributions. Employees must also remember to re-enroll and elect a new contribution amount each year during open enrollment.