A Flexible Spending Account — an employer-offered tax-advantaged account that lets you set aside pre-tax dollars for qualified medical or dependent care expenses.

FSA — Fiscal Word Money Glossary

What FSA Means in Plain English

An FSA — Flexible Spending Account — lets you set aside pre-tax money from your paycheck to pay for out-of-pocket medical expenses. You elect how much to contribute during open enrollment, and that amount comes out of your paychecks before income tax is calculated, reducing your taxable income.

The key word in “Flexible Spending Account” is spending. Unlike an HSA, the FSA is designed to be spent down each year. Most plans have a use-it-or-lose-it rule: whatever you don’t spend by the plan year deadline is forfeited back to your employer.

FSAs are available through employers — you can’t open one on your own. They work with any type of health insurance plan, not just high-deductible plans like an HSA requires.

How FSA Works

Contribution limits (2024): $3,200 per year for a healthcare FSA. This limit is per employee — couples where both spouses have FSAs through their respective employers can each contribute $3,200.

The upfront availability feature: Unlike an HSA where you can only spend what’s been contributed, your entire annual FSA election is available on January 1. If you elect $2,400 for the year and need a $1,500 medical procedure in January, you can pay with your FSA card even though only one month of contributions has been deposited. If you leave the job mid-year, you keep any difference you used beyond what was contributed (though not by design — just the reality of the structure).

Use-it-or-lose-it rule: This is the critical constraint. You must spend FSA funds before the plan year ends — typically December 31. Employers may offer one of two options: a 2.5-month grace period (allowing spending until March 15 of the next year) or a $640 carryover into the next plan year. Employers choose which option, if any, to offer — many offer neither. Check your plan’s rules during open enrollment.

What qualifies: Copays, deductibles, prescriptions (including over-the-counter medications), dental and vision care not covered by insurance, contacts and glasses, and many medical supplies. The IRS defines qualified expenses — if in doubt, FSAstore.com maintains an up-to-date eligible expenses list.

Dependent Care FSA: This is a separate account entirely. A DCFSA lets you set aside up to $5,000/year pre-tax ($2,500 if married filing separately) for childcare expenses — daycare, preschool, after-school care, summer day camps. If you have children and pay for care, this is one of the easiest tax savings available to you.

Why FSA Matters to You

The FSA’s primary value is the tax savings, which are meaningful. If you’re in the 22% federal tax bracket and contribute $3,200 to an FSA, you save $704 in federal taxes. Add state income tax savings and FICA (where applicable), and the effective discount on medical spending can be 30%+.

The tradeoff is the planning required. You’re committing to a spending amount in October or November for the following year — before you know exactly what your healthcare spending will be. Contribute too much and you risk forfeiting funds. Contribute too little and you leave tax savings on the table.

A reasonable approach: estimate your predictable healthcare spending (copays, prescriptions, contacts, planned dental work) and contribute that amount. Don’t swing for the ceiling if your usage is uncertain.

Quick Example

Blake expects to spend approximately $1,800 in healthcare costs next year: $400 in copays, $600 in prescription costs, $300 for new glasses, $500 for a dental procedure. Blake elects $1,800 in FSA contributions, which are deducted pre-tax from each paycheck ($69.23/biweekly).

At the 24% federal + 5% state tax bracket, Blake saves $522 in taxes on that $1,800 — a 29% discount on healthcare spending that was happening anyway.

Common Misconceptions

FSA and HSA are the same thing. They both offer tax benefits for medical spending, but they’re very different. HSAs require an HDHP, roll over forever, are portable, and can be invested. FSAs work with any plan, expire annually, stay with your employer, and don’t grow.
Unused FSA money comes back to you. No — it typically goes back to your employer. Check whether your plan offers a grace period or carryover option, and spend down your balance strategically before year end.
You can only use FSA funds after they’ve been deposited. The healthcare FSA fronts you the full annual amount on day one of the plan year. You can use your total election immediately.