Flexible Spending Account (FSA)

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is an employer-established, pretax account that lets employees set aside wages to pay for qualified medical, dental, and dependent-care expenses. Contributions reduce taxable income, and reimbursements for eligible expenses are tax-free. Employers may also contribute to employees’ FSAs.

Key points

• FSAs are funded with pretax payroll deductions, lowering taxable income.
• Reimbursements for qualified expenses are tax-free.
• Most FSA funds must be used within the plan year, but employers may offer a short grace period or a small carryover.
• There are separate FSAs for medical expenses and dependent care, each with its own contribution limits.

How FSAs work

• You elect an annual contribution amount through your employer; contributions are taken from paychecks before taxes.
• The IRS sets annual contribution limits (for example, the medical FSA limit was $3,200 for 2024).
• Employers may contribute to an employee’s FSA; employer contributions are not taxable to the employee and generally do not reduce the employee’s contribution limit.
• Reimbursements cover qualifying medical, dental, vision, and dependent-care expenses as defined by the IRS.

Contribution limits (examples)

• Medical FSA: $3,200 (2024 limit).
• Dependent-care FSA: $5,000 for joint or individual filers (or $2,500 if married filing separately) for 2024.
  Note: Limits change periodically; check current IRS guidance or your employer plan documents.

Eligible expenses (common examples)

• Medical and dental visits, tests, treatments, and copayments
• Prescription medications, insulin, and certain over-the-counter drugs (no prescription required per CARES Act)
• Menstrual care products (permanent CARES Act provision)
• Medical equipment such as crutches, bandages, diagnostic devices
• Dependent-care FSA covers child care for children under 13 and qualifying adult dependent care, subject to IRS rules

FSAs do not cover insurance premiums. Cosmetic procedures and general wellness items (e.g., gym memberships) are generally ineligible.

Pros and cons

Pros
* Lowers taxable income by using pretax dollars.
* Pays for a wide range of medical, dental, and dependent-care costs.
* Can reimburse deductibles, copayments, and coinsurance.

Cons
* Use-it-or-lose-it: unspent funds at the end of the plan year can be forfeited.
* Not usable for insurance premiums.
* Not all health-related expenses are eligible.

Use-it-or-lose-it, grace periods, and carryovers

Employers choose how to handle unused funds when the plan year ends. Common options:
* Grace period: up to 2½ months into the new year (often through March 15) to incur expenses.
* Carryover: allow a limited carryover amount into the next plan year (examples: up to $610 carried from 2023 to 2024; $640 from 2024 to 2025).
Employers may offer neither, one, or the other—check your plan documents.

Limited-purpose FSA (LPFSA)

A limited-purpose FSA can be used alongside a Health Savings Account (HSA). LPFSAs typically only reimburse dental and vision expenses, allowing you to preserve HSA eligibility for medical expenses.

Dependent-care FSA specifics

• Pays qualifying child-care or adult dependent-care expenses so you (and your spouse, if applicable) can work.
• Has different contribution limits than medical FSAs.
• To use funds for dependents, they generally must be claimed as dependents on your tax return.

Coordination with other plans

• HSAs: A standard FSA typically disqualifies you from contributing to an HSA; an LPFSA is designed to work with an HSA.
• Marketplace plans: Plan rules vary—if you’re using a Marketplace high-deductible plan, an HSA is typically the pretax savings vehicle referenced by marketplaces. Check plan eligibility and advisor guidance.

How to decide how much to contribute

• Estimate your expected out-of-pocket medical, dental, and dependent-care expenses for the year.
• Factor in recurring costs (prescriptions, regular treatments), planned procedures, and predictable dependent-care expenses.
• Consider employer contributions and whether your employer offers a grace period or carryover before finalizing your election.

Bottom line

FSAs provide a tax-advantaged way to pay for eligible medical and dependent-care expenses. They can lower tax liability and make routine and predictable health or care costs more affordable—but because unused funds may be forfeited, careful planning is essential. Review your employer’s plan rules, contribution limits for the current year, and options for grace periods or carryovers before electing an amount.