A flexible spending account (FSA) is an employer-sponsored savings account that lets you contribute pre-tax funds. You may use this money for approved medical and dependent care expenses.
A flexible spending account (FSA) is an account that allows you to save pre-tax dollars and use them toward your medical and dependent care expenses.
Many employers offer FSAs as a benefit. You can use the money in your medical FSA to purchase a wide variety of healthcare necessities.
This includes prescriptions, approved over-the-counter (OTC) medications, and diabetes supplies. You can also use your medical FSA funds to cover the cost of expenses, such as dental care, vision care, and medical copayments.
You can use funds from a dependent care FSA to help cover the cost of care for children and dependent adults who require day care services.
FSAs aren’t the right financial choice for everyone. Rules about contributions and spending might make them a poor fit for your individual needs. For some people, though, FSAs can be a smart way to save on healthcare and dependent day care costs.
A flexible spending account (FSA) is a savings account that you can use to pay for out-of-pocket healthcare or dependent care costs. You do not pay taxes on the money you put into an FSA. This allows you to save money on these expenses.
FSAs are tied to employer-offered benefits. You won’t find them with plans such as Medicare or Medicaid, or plans available on the Health Insurance Marketplace.
Your FSA is funded by a deduction from your paycheck. You’ll select an amount in advance and each payday, that amount will go into your FSA. In some cases, your employer might also contribute to your FSA.
There are two primary types of FSAs:
- health FSA
- dependent care FSA
A medical care FSA is the type most people are familiar with. This is the type of FSA that allows you to put aside money for medical and dental expenses.
Dependent care FSA
Some employers also offer a type of FSA called a dependent care FSA. This type of FSA allows you to set aside money for expenses such as day care, babysitting, long-term care, and home healthcare.
Employers’ Commuter Benefits Programs (so-called commuter FSAs)
Though not technically an FSA, some employers offer commuter benefits that include pre-tax savings of up to $300 a month that may be used for public transportation or parking for work. These benefits are for the employee only and do not cover spouses or dependents.
You can use an FSA to pay for everyday medical and healthcare costs. There’s a wide range of items that are FSA-eligible. This includes:
- OTC medications
- home medical devices, including diabetes monitors
- home modifications such as bathroom safety railings
- first aid supplies
- prescription sunglasses
- eye exams
- contact lenses
- contact lens fluid
- breast pumps and breastfeeding supplies
- dental treatments
- chiropractic treatments
- birth control
- menstrual products
- pregnancy and fertility testing
You can use a dependent care FSA to help pay for the cost of caring for children under age 12 or for adult dependents who are unable to care for themselves.
If you have any dependents, you know likely know how fast these costs can add up. Being able to pay for them with pre-tax funds can be a big help for some families. You can use FSA funds for expenses such as:
- day care
- summer camp
- after school care
- home healthcare
- personal care
FSAs can vary depending on your health insurance plan and your employer’s benefits package, but all FSAs are required to follow certain federal guidelines. These include:
- Your health FSA contributions are limited to $3,050 in 2023. A married couple will be able to put $3,050 each into separate FSAs with separate employers.
- Your dependent care contributions are limited to $2,500 if you are married and filing taxes separately and $5,000 if you are single or married and filing taxes jointly.
- Your FSA funds can be spent only on medical, dental, and day care expenses for you, your spouse, or your dependents.
- Health FSAs can be used to cover only certain medical and dental expenses.
- Dependent care FSAs can be used only for certain day care expenses for your dependents.
- You can use your FSA funds to pay for deductibles and copayments, but you cannot use them for insurance premiums.
- You generally need to use all the money in your health FSA within a calendar year. Your employer may offer two optional rollover options: a 2.5-month grace period or a $610 rollover allowance. Not all employers offer these options.
- You generally need to use all the money in your dependent care FSA within a calendar year. Your employer may offer two optional rollover options: a 2.5-month grace period or a $570 rollover allowance. Not all employers offer these options.
There are multiple benefits to an FSA. They offer several advantages that can make them a good choice in some situations. Benefits of FSAs include:
- The money is tax-free: Since you’re spending money you weren’t taxed on, you’re getting substantial savings when you use FSA funds.
- You can borrow against an FSA: With nearly all employers, your FSA works like a line of credit each year. This means that if you have a large expense in March, you’ll be able to use an entire year’s worth of FSA funds toward paying it. You can then pay it back by paying into your account for the rest of the year.
- The money is set aside for medical expenses: Having money set aside for medical expenses means you can count that money being there for those important healthcare needs.
- Your employer can contribute: In some workplaces, there are employer contributions toward FSAs. If your company offers this benefit, you can get even more value from your FSA.
An FSA isn’t the right choice for everyone. There are some risks involved in using this healthcare option. These include:
- The money does not roll over: You need to use the money in your FSA each year. Some employers offer small grace periods, but as a rule, you need to use the money in a calendar year. If you don’t, you’ll lose all the money you’ve contributed.
- FSAs are tied to your employer: Your FSA is tied to your employer and your company’s health plan. This means that although your FSA is yours, you won’t be able to keep it if you leave your job for any reason. The money you have in your account will be lost.
You can learn more about FSAs by reading the answers to common questions.
Are FSAs the same thing as HSAs?
It’s easy to confuse FSAs and HSAs, but these two healthcare accounts are actually very different.
Both accounts are attached to health plans and can be used to pay for similar items, but a health savings account (HSA), isn’t tied to an employer health plan.
HSAs are attached to high-deductible health plans. The money in HSAs rolls over from year to year, but you can’t borrow against the future value of your HSA.
How much can my employer contribute to my FSA?
Employers can contribute to an FSA. The IRS allows employers to contribute up to $500 to an employee’s FSA, even if the employee doesn’t make any of their own contributions. If the employee does make contributions, the IRS allows an employer to match those contributions up to the maximum permitted amount.
This means that if you contributed the maximum $3,050 in a calendar year, your employer could match that and contribute another $3,050, giving you a total of $6,100. Keep in mind that not all employers contribute to employee FSAs.
Can I use a dependent care FSA to pay for private school tuition?
No. Dependent care FSAs can be used for expenses such as preschool and day care, but tuition at school for older children isn’t a covered expense. However, there are exceptions. If the private school is a school that addresses the special needs of a child with a developmental or physical disability, your dependent care FSA is more likely to cover it.
An FSA is a healthcare option that can help you save money on everyday medical expenses and on large healthcare purchases. The money is set aside from your paycheck pre-tax and is available whenever a medical expense arises.
You can use FSA money for everything from OTC medications to sunscreen. You can also set up a dependent care FSA. This allows you to set aside money for expenses such as day care or home healthcare.
There are some drawbacks to an FSA. For instance, you need to spend the money in a single calendar year, and the money is tied to your employer. This means you could lose it if you leave your job. However, for many families, FSAs are a smart way to save money on healthcare expenses.