What is an FSA? Guide to Flexible Spending Accounts

Several years ago, I wanted to have LASIK eye surgery. I knew it would be expensive, and I had to think carefully about how I was going to pay for it. Open enrollment was coming up, and I decided to take advantage of an employee benefit that helps you save on eligible healthcare costs: a Flexible Spending Account (FSA).

I signed up for the FSA and chose to set aside the amount of money I'd need to cover the surgery. My employer then automatically deducted pre-tax dollars from each of my paychecks over the course of the year to equal the necessary amount. FSA contributions aren't subject to payroll taxes, so I was saving for my surgery with tax-free dollars.

Healthcare costs are a fact of life, and if you're planning ahead—whether for surgery or routine care—it's worth understanding how an FSA works. Ahead, we'll walk through what FSAs cover, how much you can contribute, how they differ from HSAs, and what to know before signing up.

A Flexible Spending Account (FSA) is a tax-advantaged account offered by employers. It allows you to use pre-tax money to pay for qualified medical expenses, reducing your taxable income and out-of-pocket healthcare costs.

You can use FSA funds for a wide range of eligible expenses, including doctor visits, prescriptions, dental and vision care, and more. Some employers also offer a Dependent Care FSA to help cover childcare or elder care costs.

One key benefit of an FSA is that you get access to your full annual contribution amount on the first day of the plan year—even though the money is deducted from your paycheck over time. This makes it a smart way to plan ahead for known or expected healthcare expenses.

Each year during open enrollment, you have the opportunity to enroll in an FSA. An FSA allows you to set aside money from your paycheck before taxes to pay for eligible healthcare expenses. Typically, you must be enrolled in your employer's health insurance plan to qualify.

You decide how much to contribute to your FSA account up to a set annual limit. For 2025, the maximum contribution limit for a healthcare FSA is $3,300. The amount you choose will be automatically deducted from your paycheck in pre-tax installments over the course of the year, which reduces your taxable income.

These tax savings are one of the biggest benefits of an FSA—and depending on your plan, your employer may contribute FSA money to your account as well. Employer contributions generally don't count toward your annual contribution limit.

Some FSA plans require you to submit receipts for reimbursement, while others may provide you with a debit card to pay for eligible expenses throughout the year. Either way, you can use your FSA funds throughout the year as needed to cover healthcare expenses for yourself, your spouse, your children, or other dependents you claim on your taxes.

You can use your FSA to pay for a wide range of eligible health care expenses including medical, dental, and vision expenses not covered by insurance. FSA-eligible expenses include:

• Co-pays, co-insurance, and deductibles
• Physical therapy, chiropractor, and acupuncture
• Prescription drugs, insulin, and prescribed over-the-counter medicine
• Dental expenses like exams, cleanings, X-rays, and braces
• Vision exams, contact lenses and supplies, eyeglasses, and laser eye surgery
• Over-the-counter health care items: bandages, pregnancy test kits, blood pressure monitors, etc.

And withdrawals from your FSA for eligible expenses are tax free.

Your benefits plan provider should be able to give you a complete list of eligible expenses, or you can find more information at IRS Publication 969.

Here are some common expenses that cannot be paid for with FSA funds:

• Insurance premiums, including health, dental, vision, life, and disability insurance
• Cosmetic procedures such as teeth whitening, Botox, or elective plastic surgery
• Gym memberships or fitness programs, unless prescribed for a medical condition
• Vitamins and supplements, unless prescribed for a specific condition
• Over-the-counter medications without a prescription (some exceptions apply)
• Personal care items like toothpaste, deodorant, or shaving cream
• Maternity clothes, diapers, or baby formula
• Long-term care services

There is no one-size-fits-all contribution amount. It's important to think ahead, but try not to contribute more than you'd realistically spend during the plan year. Estimate your costs for copays, coinsurance, prescriptions, and other expected expenses to budget for that amount.

FSAs are typically subject to a "use it or lose it" rule, meaning you could forfeit any unused funds at the end of your plan year. Many employers, however, offer a little flexibility through:

• A "grace period" (up to two-and-a-half months) that extends into the following year where you can use up your funds.
• A carryover option that allows you to roll over a certain dollar amount into the following year.

Under IRS rules, employers can offer only one of these options, not both. Check your plan details to know what to expect.

Also keep in mind:

• If you leave your job, you usually can't take your FSA funds with you.
• Most FSA plans don't allow mid-year changes unless you experience a qualifying event.

You and your spouse can each have an FSA and can each make the maximum contribution limit per year per employer.

If your employer offers a healthcare FSA, you might also ask about an FSA for dependent care. This is a separate account, which could be a potential financial help for working parents or those caring for an elderly parent. A Dependent Care FSA works like a healthcare FSA but is designed specifically for working adults to help cover costs related to childcare or adult dependent care. Eligible dependent care expenses can include daycare, preschool, after school programs for children under age 13, as well as adult care for elderly or disabled dependents. Fortunately, you don't have to choose between one type of FSA or the other. You can have both.

No. If you're enrolled in a high-deductible health plan (HDHP) with a Health Savings Account (HSA), you're not eligible to contribute to an FSA. However, you may be able to contribute to a Limited-Purpose FSA, which will allow you to pay for vision and dental expenses not covered by your insurance.

An HSA offers similar tax advantages, allowing you to set aside pre-tax dollars to pay for qualified medical expenses—but it’s specifically designed to pair with HDHPs.

Both FSAs and HSAs offer tax advantages for managing health care costs, but they differ in eligibility, ownership, portability, and investment options. Here's a side-by-side comparison.

FSAs are a way you could save money on out-of-pocket health care costs for qualified medical expenses. Sure, it takes a little planning ahead, but you can reduce your taxable income and have funds ready for qualified medical expenses when they come up. If your employer offers an FSA, when open enrollment time comes around, consider exploring this employee benefit that could give your budget a little extra breathing room.