Flexible Spending Account
An employer-sponsored account allowing pre-tax contributions for qualified medical or dependent care expenses, with annual use-it-or-lose-it requirements.
A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to contribute pre-tax dollars to an account used for qualified medical expenses (Healthcare FSA) or dependent care expenses (Dependent Care FSA). Unlike HSAs, FSAs do not require enrollment in a high-deductible health plan and are available to most employees with employer-sponsored health coverage.
For 2024, Healthcare FSA contribution limits are $3,200 per employee (not family), with a grace period or rollover option at the employer's discretion. The FSA rollover maximum is $640 in 2024 — employees who don't use FSA funds by the plan year end (or grace period) forfeit the remainder to the employer. This 'use-it-or-lose-it' rule is the primary limitation of FSAs versus HSAs.
A unique FSA advantage: the entire annual election is available from January 1 (or enrollment date), even if contributions haven't been fully funded yet. An employee who elects $3,200 and incurs a $2,500 medical expense in January can submit the full $2,500 for reimbursement even though only $267 has been contributed ($3,200 ÷ 12 months). If they then leave the company in March, they've used more than they contributed — a pre-funding benefit.
Dependent Care FSAs (DCAPs) have separate limits: $5,000 per household ($2,500 if married filing separately) for qualifying child/dependent care expenses. This covers daycare, preschool, after-school care, and summer day camps for children under 13. The DCAP benefit must be compared to the Child and Dependent Care Tax Credit — the tax credit may provide more value for lower-income families.
Limited Purpose FSAs are a special variant available to HSA holders — covering only dental and vision expenses, they don't disqualify HSA eligibility while still providing a pre-tax benefit for known dental and vision costs.
FAQs
What expenses qualify for FSA reimbursement?
Healthcare FSA covers medical, dental, and vision expenses not covered by insurance: deductibles, copays, prescription drugs, orthodontia, glasses, contacts, LASIK, and many OTC products (bandages, thermometers, menstrual products, most medications). The IRS updates the eligible expense list periodically — consult IRS Publication 502 or your FSA administrator for a comprehensive list.
What happens to my FSA if I leave my job mid-year?
At termination, your FSA ends and unreimbursed balances are generally forfeited (you keep any reimbursements already received, even if exceeding contributions — the pre-funding benefit). COBRA continuation of FSA coverage is sometimes available, allowing you to continue contributing and spending through year-end. Check with your HR department about your specific plan's COBRA FSA terms.
Can both spouses have a Healthcare FSA?
Yes — each spouse can have a Healthcare FSA through their own employer, with each contributing up to the annual limit. However, you cannot contribute to an HSA if your spouse has a non-limited Healthcare FSA (because you would be considered 'covered by a general purpose health FSA' which disqualifies HSA eligibility). A Limited Purpose FSA (dental/vision only) for one spouse does not disqualify the other's HSA.
Related Terms
Health Savings Account
A tax-advantaged savings account paired with a high-deductible health plan, offering triple tax benefits for qualified medical expenses.
Benefits Administration
The management of employee benefits programs including health insurance, retirement plans, PTO, and other compensation components.
COBRA
A federal law requiring employers with 20+ employees to offer continuation of group health insurance coverage to employees who lose coverage due to qualifying events.
Payroll Tax
Taxes levied on wages and salaries, split between employee withholding and employer contributions, funding social programs like Social Security and Medicare.
