What Is an FSA Contribution and How Does It Work?

Flexible Spending Accounts (FSAs) offer a way to manage out-of-pocket healthcare or dependent care expenses with tax advantages. These accounts are typically part of an employee benefits package provided by an employer. Individuals can set aside pre-tax money to cover eligible costs, which can lead to tax savings throughout the year.

Understanding FSA Contributions

An FSA contribution is money an employee designates to be withheld from their paycheck and deposited into their Flexible Spending Account. These pre-tax contributions are deducted from an employee’s gross income before taxes are calculated. This pre-tax treatment reduces the employee’s taxable income, leading to savings on federal income tax, Social Security tax, and Medicare tax.

While contributions are primarily funded by employees through payroll deductions, employers can also contribute to an employee’s FSA. Employer contributions are more commonly observed with Dependent Care FSAs, though they are less frequent for Health FSAs. The Internal Revenue Service (IRS) sets annual limits on contributions. Funds are typically available at the beginning of the plan year, even if the full annual contribution has not yet been deducted from paychecks.

There are two main types of Flexible Spending Accounts: Health FSAs and Dependent Care FSAs. A Health FSA is used to pay for qualified medical expenses for the employee, their spouse, and eligible dependents. These expenses can include deductibles, co-payments, and prescription medications. A Dependent Care FSA is specifically for eligible dependent care expenses, such as childcare costs, that enable the employee and their spouse to work or look for work.

Key Rules for FSA Contributions

Rules govern Flexible Spending Account contributions, including annual limits and how unspent funds are handled. For 2025, the maximum amount an employee can contribute to a Health FSA is $3,300. This limit is adjusted annually by the IRS. If an employee’s spouse also has a Health FSA through their employer, they can each contribute up to the maximum amount to their respective plans.

Dependent Care FSAs have different contribution limits. For 2025, the maximum contribution is $5,000 per household for single individuals or married couples filing jointly. For married individuals filing separately, the limit is $2,500 each.

A rule for FSAs is the “use-it-or-lose-it” provision, which generally requires participants to spend their FSA funds by the end of the plan year or forfeit any remaining balance. To mitigate this, employers have the option to offer one of two exceptions, but not both. One exception is a grace period, which typically extends the time to incur eligible expenses by up to two and a half months after the plan year ends.

The other exception is a carryover option, allowing a specific amount of unused Health FSA funds to roll over into the next plan year. For 2025, the maximum carryover amount for a Health FSA is $660. This carryover does not affect the employee’s ability to elect the maximum contribution for the new plan year. Employers offering an FSA decide whether to implement a grace period, a carryover, or neither. Dependent Care FSAs typically do not offer a carryover, but may offer a grace period.

FSA enrollment typically occurs during the annual open enrollment period, when employees make their benefit elections for the upcoming year. Once an election is made, it is generally irrevocable for the plan year. However, changes to contribution amounts can be made mid-year under “qualifying life events.” These events include changes in legal marital status, changes in employment status affecting benefits eligibility, or changes in the number of tax dependents due to birth, adoption, or death. The requested change must be consistent with the qualifying event, such as increasing contributions after the birth of a child to cover new medical or childcare costs.

Spending Your FSA Contributions

Once funds are contributed to an FSA, they can be used for eligible expenses determined by the IRS. For a Health FSA, eligible expenses generally include costs related to the diagnosis, cure, mitigation, treatment, or prevention of disease. This covers medical, dental, and vision care, such as doctor’s office co-pays, prescription medications, eyeglasses, contacts, and dental work like fillings or orthodontia. Over-the-counter medications and feminine hygiene products also qualify.

Dependent Care FSA funds are for expenses that allow the account holder and their spouse to work, seek employment, or attend school. Eligible expenses include daycare, preschool, and nursery school fees for children under 13. Care for a disabled spouse or dependent who is physically or mentally incapable of self-care also qualifies. This can include before- and after-school care, summer day camps, and certain nanny services. Educational expenses, such as kindergarten or private school tuition, are not eligible.

Accessing FSA funds is commonly done through an FSA debit card provided by the plan administrator. This card can be used directly at the point of sale for eligible expenses, similar to a regular debit card. Alternatively, participants can pay for services or products out-of-pocket and then submit a claim for reimbursement from their FSA. Reimbursement claims typically require documentation, such as itemized receipts or Explanation of Benefits (EOB) statements, detailing the service, date, and amount. Maintaining detailed records is important, as the IRS may request documentation to verify eligibility.