A healthcare flexible spending account, often called an FSA or flexible spending arrangement, provides a way to set aside pre-tax money for medical expenses. To take full advantage of it, however, it’s essential to understand the rules and eligibility criteria.
An HCFSA is a component of your employer’s benefits package. Typically, you’ll establish it during your company’s annual open enrollment period for the upcoming plan year. Once you’re signed up, your employer will automatically deduct your chosen amount from your paycheck and accumulate it in a special account. You then file claims to be reimbursed for out-of-pocket medical costs. As long as these costs are eligible for FSA, your reimbursements remain tax-free.
To qualify for an HCFSA, you must work for an employer that offers it—unfortunately, self-employed individuals don’t have access to this benefit. Additionally, if you possess a health savings account (HSA), you won’t be eligible for an FSA.
Contributions to your FSA are made with pre-tax income, meaning they haven’t yet been subjected to federal income or payroll taxes. This effectively reduces your taxable income, lowering your tax liability. Your employer can also contribute to your FSA, boosting your savings. The IRS views both employer and employee contributions equally, and neither is considered taxable income.
For 2025, you can contribute up to $3,300 to your FSA, which is an increase of $100 from 2024. If your spouse also has an FSA, you can both contribute to the maximum, totaling $6,600 for your family. This annual contribution cap applies only to deductions from your salary, so employer contributions won’t affect your limit.
While the IRS offers guidance on FSA fund usage, it’s wise to review your employer’s specific plan details as well.
Your FSA can be used to cover medical and dental expenses not covered by your health insurance for you, your spouse, and dependents. The allowable expenses typically address the treatment or prevention of physical or mental health conditions, rather than general wellness items like vitamins or spa services. Eligible expenses can encompass:
- Medical, dental, and vision expenses beyond what your health coverage includes, such as doctor co-pays, coinsurance, and deductibles.
- Prescription and over-the-counter medications.
- Additional healthcare products, like bandages, prescription eyeglasses, heating pads, and pregnancy tests.
Commonly used items, regardless of medical conditions, like dental floss, vitamins, and cosmetics, generally don’t qualify. Also, FSA funds can’t be allocated towards health insurance premiums or long-term care.
To utilize your FSA savings, you have two options. You can pay healthcare costs out of your own funds and then submit claims for reimbursement from your FSA. Alternatively, some employers offer a debit card linked to your FSA, enabling you to pay medical expenses directly without waiting for reimbursements.
Any leftover funds typically vanish at the year-end unless your employer allows extra time or rollovers. A grace period may allow use of last year’s funds for expenses several months into the new year, while carryover grants permission to transfer up to $640 of your 2024 funds into 2025.
As an employee benefit, your FSA balance may also disappear if you leave your job.
Depending on your company’s benefits, you might have additional options for tax-advantaged savings accounts. Consider these:
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Dependent Care FSA: Save pre-tax dollars for childcare and other dependent care expenses, which can cover daycare, school programs, day camps, and elder care.
- Health Savings Account (HSA): Available if you’re on a high-deductible health plan (HDHP). Contributions are tax-deductible and reserved for eligible medical costs. Unlike FSAs, HSAs don’t require employer participation, and your savings can permanently grow tax-free for future use.
Further reading includes HSAs as a retirement plan for healthcare.
Unlike other accounts, FSA funds, unless a grace period or rollover applies, don’t roll over to the next year. With a grace period, you might use FSA funds for up to two and a half months into the new year. Carryover policies might let you continue up to $640 of your previous balance.
You’re entitled to a healthcare FSA if your employer offers it. Notably, you generally can’t combine a healthcare FSA with an HSA. If you’re a highly compensated individual, specific additional rules may apply.
What is the Difference Between an HSA and FSA?
Both HSAs and FSAs allow for building pre-tax savings for qualified healthcare costs. Usually, participation in both isn’t an option. FSAs are exclusive to employer offers and typically require year-end fund usage. HSA funds remain yours, regardless of employment. You can either use them for current medical expenses or invest them to grow tax-free for healthcare after age 65.
What is the Difference Between an HRA and FSA?
An HRA, or health reimbursement account, functions similarly to an HSA for covering medical expenses. HRA funds, however, are solely employer-contributed. While they may roll over annually, they’re forfeited upon leaving your job.
