Flexible Spending Accounts: Basics, Benefits, and Drawbacks (2023)

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.

(Video) What is an FSA (Flexible Spending Account?)

There are two primary types of FSAs:

  • health FSA
  • dependent care FSA

Health 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.

What expenses are covered by a medical FSA?

(Video) Beyond the [Employee Benefits] Basics: Flexible Spending Accounts (FSAs)

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:

  • copayments
  • deductibles
  • prescriptions
  • OTC medications
  • insulin
  • home medical devices, including diabetes monitors
  • home modifications such as bathroom safety railings
  • first aid supplies
  • eyeglasses
  • 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
  • sunscreen

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:

  • preschool
  • 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.
(Video) What is a Flexible Spending Account (FSA)? - Sentinel Benefits

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.

(Video) What Is a Flexible Spending Account? - The White Coat Investor - Basics

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.


What are the benefits of having a flexible spending account? ›

A Flexible Spending Account (FSA, also called a “flexible spending arrangement”) is a special account you put money into that you use to pay for certain out-of-pocket health care costs. You don't pay taxes on this money. This means you'll save an amount equal to the taxes you would have paid on the money you set aside.

What is the greatest disadvantage associated with FSAs? ›

The most significant disadvantage of FSAs is that you lose any unspent money at the end of each year. While employers may opt to roll over up to $500 or extend your timeframe for using these funds by 2.5 months, neither of these options is mandatory.

Is FSA worth the hassle? ›

Are Flexible Spending Accounts worth it? Yes, as long as you have somewhat predictable medical expenses each year, and/or dependent care expenses. You can expect to save around 20- 25% in taxes on every dollar you put in. As your income rises, your savings increase.

Is it smart to have an FSA? ›

As an account holder, an FSA helps you pay for things you likely already have to pay for, but now you get to do it tax free. There are hundreds of eligible expenses for tax-free purchase with your health care FSA funds, including prescriptions, doctor's office copays, health insurance deductibles, and coinsurance.

Is FSA still use it or lose it? ›

Flexible spending accounts are back to use-it-or-lose-it During the pandemic, the IRS allowed Americans to roll over the balances in their health flexible spending accounts. But the end of 2022 marks the return of the use-it-or-lose-it policy for most FSAs.

Does FSA hurt your credit? ›

Does Your FSA Card Impact Your Credit? “While FSA cards look and behave like credit or debit cards where they're accepted,” says credit scoring expert Barry Paperno, “like debit cards, they don't appear on your credit report or get included in your credit scores.

How much money should I put in my FSA? ›

When considering how much to contribute to an FSA, think about your past and future medical expenses. Contribute only what you think you'll use for the year. Remember, you can use this account for a host of eligible medical expenses, including dental and vision expenses.

Is FSA good for dental? ›

According to the Internal Revenue Service Publication 752, an individual can use their FSA coverage for all dental procedures that treat or prevents a dental disease such as: Teeth cleaning. Root canals. Dental fillings.

Is it better to do FSA or HSA? ›

FSA vs HSA: Which is Better? Overall, the higher limits and contribution rollover of the health savings account make it a better choice if you can qualify. HSAs are more flexible than FSAs, allowing you to save for potential medical expenses and accumulate money over time.

How much should I put in my FSA 2022? ›

Once you have your total, compare it to the maximum amount the IRS lets you put into an FSA. In 2022, the limit is $2,750 per year per employer. “Maxing out your contributions is only a good idea if you know you'll spend that much or more on medical bills during the year,” says Melanie Musson.

Why is FSA money use it or lose it? ›

The IRS' use-or-lose rule states that FSA funds must be spent by the participant within the FSA's plan year. That means FSA participants typically need to spend most or all of their FSA funds by the end of the plan year. Unused funds at the end of the plan year are forfeited to the plan.

Who keeps leftover FSA money? ›

If the employee fails to incur enough qualified expenses to drain his or her FSA each year, any leftover balance generally reverts back to the employer. However, there are two exceptions to the use-it-or-lose-it rule. An FSA plan can allow a grace period of up to 2 1/2 months.

Does FSA money expire? ›

Usually, money that goes unused in an FSA account is forfeited at the end of the calendar year (except for the COVID-19 changes for 2021 and 2022). But some plans offer a grace period or acarryover.

Can you withdraw FSA money? ›

Unfortunately, FSA cards cannot be used to withdraw FSA funds from an ATM. These cards can only be used on qualifying medical products and services.

Does FSA lower your take home pay? ›

Since taxes are not deducted from your FSA payroll contributions, you'll pay less in federal, state, and FICA taxes—which means more take-home pay!

Does FSA go away if you quit? ›

Any unused money in your FSA goes back to your employer once you leave your job. If you have a healthcare FSA, you could have the option to continue access to your funds through COBRA. But you can't use your FSA contributions to pay for health insurance premiums either through COBRA or in the private market.

How much should I put in flex spending account? ›

When considering how much to contribute to an FSA, think about your past and future medical expenses. Contribute only what you think you'll use for the year. Remember, you can use this account for a host of eligible medical expenses, including dental and vision expenses.

Do I have to pay back FSA if I quit my job? ›

Employers are not allowed to ask for money back that you spent from your FSA if you quit or retire. This is due to the Uniform Coverage rule which ensures that your Flexible Spending Account funds are available to you in full as soon as your plan year starts. Any FSA amount you don't use is returned to your employer.

Can I use FSA to pay for gym membership? ›

Can you use FSA funds to pay for a gym membership or exercise classes? The Internal Revenue Service (IRS) typically does not allow funds from a Flexible Spending Account (FSA) to pay for membership dues at health clubs or gyms.

Do I use my FSA card like a debit card? ›

Flex spending cards are essentially the same as debit cards but used only to cover eligible medical expenses, drawing the funds from your FSA.

Can I use my FSA card for groceries? ›

No, you can't use your Flexible Spending Account (FSA) or Health Savings Account (HSA) for straight food purchases like meat, produce and dairy. But you can use them for some nutrition-related products and services. To review, tax-advantaged accounts have regulatory restrictions on eligible products and services.


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