Cecily Zamora
A Flexible Spending Account (FSA) is a tax-free savings account that allows individuals to set aside money on a pre-tax basis to pay for qualified medical expenses. It is a medical benefit intended to finance annual out-of-pocket medical expenses for the individual, their spouse, and dependents. The money in an FSA can be used for co-pays, deductibles, and a range of medical products and services, including dental and vision care. It is important to note that FSAs have a use-it-or-lose-it rule, where unused funds at the end of the plan year may be forfeited, although some exceptions and extensions may apply.
| Characteristics | Values |
|---|---|
| Type of Account | A Flexible Spending Account (FSA) is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. |
| Tax Benefits | Money used for qualified expenses from the FSA is free from taxes. |
| Tax Savings | If you contribute $2,000 into an FSA account, and your tax rate is 30%, you would have a tax savings of $600. |
| Maximum Contribution | Employees can contribute up to $3,300 in 2025. |
| Use-it-or-lose-it Rule | Unused funds at the end of the plan year may be forfeited. However, the Internal Revenue Service (IRS) offers employers the option to allow employees until March 15 of the following year to use FSA funds from the previous year. |
| Carryover Limit | The IRS carryover limit for 2024 into 2025 is $640, and $660 for 2025 into 2026. |
| Grace Period | Employers may offer a grace period of up to 2 1/2 months to use the money in your FSA after the plan year ends. |
| Eligible Expenses | Co-pays, deductibles, dental, vision care, eyeglasses, hearing aids, prescription drugs, Over-the-Counter drugs, and other medical products. |
| Eligibility | Employees of companies that offer an FSA need to act before their medical plan year begins to take advantage of an FSA. Self-employed individuals are not eligible. |
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What You'll Learn
Tax-free savings
A Flexible Spending Account (FSA) is a tax-free savings account for medical and certain non-medical expenses. It is a medical benefit intended to finance annual out-of-pocket medical expenses. The money in an FSA account is not subject to federal income tax, Social Security tax, or Medicare tax. This means that you save an amount equal to the taxes you would have paid on the money you set aside. For example, if you contribute $2,000 into an FSA account and your tax rate is 30%, you would have a tax saving of $600.
FSAs are set up by an employer in a "cafeteria" plan, where the employer provides certain benefits on a pretax basis. The money in the account can be used to pay for qualifying expenses for the taxpayer, their spouse, and their dependents. These expenses can include co-pays, deductibles, and a variety of medical products, as well as services ranging from dental and vision care to eyeglasses and hearing aids.
It is important to note that FSAs are subject to a use-it-or-lose-it rule, where unused funds at the end of the plan year may be forfeited. However, the Internal Revenue Service (IRS) offers employers the option to allow employees to carry over funds to the following year or provide a grace period for using the funds. Employers may also contribute to an employee's FSA if the plan allows.
Interested taxpayers should check with their employer to see if they offer an FSA and review any expected healthcare expenses for the year before enrolling.
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Medical expenses
A Flexible Spending Account (FSA) is a special account that allows users to set aside money on a pre-tax basis to pay for qualified out-of-pocket medical expenses. This means that the money contributed to an FSA is not subject to federal income tax, Social Security tax, or Medicare tax, resulting in tax savings for the account holder. The Internal Revenue Service (IRS) determines which expenses are reimbursable by an FSA, and eligible expenses can include copays, deductibles, coinsurance, and a variety of medical products and services.
In 2025, employees can contribute up to $3,300 to their FSA during the plan year through payroll deductions. Employers may also contribute to their employees' FSAs if the plan allows. It is important to note that FSA funds are typically subject to a "`use-it-or-lose-it`" rule, where unused funds at the end of the plan year may be forfeited. However, the IRS offers employers the option to provide a grace period of up to 2.5 extra months to use the funds or allow a rollover of up to $500 to the following year.
FSA-eligible expenses cover a wide range of medical products and services, including prescriptions, hearing aids, contact lenses, dental and vision care, eyeglasses, and more. These expenses must be for the account holder, their spouse, or their dependents. It is important to save receipts and supporting documentation, as the IRS may request itemized receipts to verify the eligibility of expenses.
By using an FSA, individuals can save on their overall healthcare costs. For example, if an individual contributes $2,000 to their FSA and has a tax rate of 30%, they would save $600 in taxes. This allows for faster access to funds and can result in significant savings on medical expenses throughout the year.
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Non-medical expenses
A Flexible Spending Account (FSA) is a special account that allows employees to set aside money on a pre-tax basis to pay for qualified out-of-pocket medical and certain non-medical expenses. The non-medical expenses that can be covered by an FSA include dependent care, adoption-related expenses, and custodial care for a dependent child under the age of 13, elder care, or disabled dependent care. These expenses are not reimbursed by insurance or other benefit plans.
Dependent care expenses are work-related and the tax credit amount can be determined by applying a percentage to the total dependent care expenses. For example, if a couple jointly contributes $6,400 to their household, they could be eligible for a tax credit on their dependent care expenses. It is recommended that the FSA is only used for adoption-related expenses that exceed the tax credit amount.
Additionally, FSAs can cover expenses for the taxpayer's spouse and dependents. The money in the FSA account can be withdrawn tax-free if it is used to pay for qualifying expenses. However, it is important to note that FSAs have a "use-it-or-lose-it" rule, where any unused funds at the end of the plan year may be forfeited. To avoid this, some FSA plans offer a grace period of up to 2.5 months after the plan year to use the remaining funds. Alternatively, some plans allow a carryover of up to $640 to the next year.
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Employer contributions
A Flexible Spending Account (FSA) is a savings account that allows employees to set aside money on a pre-tax basis to pay for qualified medical expenses. This means that employees can contribute a portion of their paychecks to an FSA before taxes are deducted, thus saving on taxes. While employers are not required to offer FSAs, they may choose to do so and can also contribute to their employees' FSAs if they wish.
The amount that employees can contribute to their FSAs is subject to an annual limit. For the 2025 tax year, employees can contribute up to $3,300 to their FSAs. This amount is periodically reviewed and updated, as it was increased from $3,050 in 2023 to $3,200 in 2024. If an employee's spouse has access to an FSA through their employer, the couple can jointly contribute up to $6,600 for their household.
The funds in an FSA can be used to pay for a variety of out-of-pocket medical expenses, including co-pays, deductibles, dental and vision care, eyeglasses, hearing aids, and certain medications. It is important to note that FSAs typically follow a use-it-or-lose-it rule, where unused funds at the end of the plan year may be forfeited to the employer. However, the Internal Revenue Service (IRS) offers employers the flexibility to allow employees to carry over a certain amount of unspent funds to the following year or provide a grace period for using the funds.
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Plan year and carryover
A Flexible Spending Account (FSA) is a special account that allows users to set aside money on a pre-tax basis to pay for qualified medical expenses. While employers are not required to offer FSAs, employees can contribute up to a certain limit through payroll deductions during the plan year. For instance, in 2024, employees could contribute up to $3,200, and in 2025, this limit was raised to $3,300. These contributions are not subject to federal income tax, Social Security tax, or Medicare tax.
The plan year for an FSA typically aligns with the calendar year, running from January 1 to December 31. It is during this period that employees can use their FSA funds to pay for eligible expenses. However, it is important to note that FSAs generally operate under a “use-it-or-lose-it” rule, where any unused funds at the end of the plan year may be forfeited.
To provide more flexibility, employers may offer two options to their employees: a grace period or a carryover. The grace period option allows employees extra time, typically up to 2.5 months, to use their FSA funds from the previous year. This means that employees have until March 15 of the following year to spend their FSA money. On the other hand, the carryover option permits employees to roll over a limited amount of unused FSA funds into the next plan year. For the 2024 tax year, the maximum carryover amount was $640, and this amount increased to $660 for the 2025 tax year.
It is worth noting that employers are not obligated to provide either the grace period or the carryover option. The specific choices available to employees depend on their company's policies. Therefore, it is advisable for employees to review the plan terms and any updates before making decisions regarding their FSA contributions and expenditures.
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Frequently asked questions
A Flexible Spending Account is a tax-free, "use it or lose it" savings account for medical and certain non-medical expenses.
Money contributed to an FSA is taken from your paycheck before taxes are deducted. This means you don't pay federal taxes on that money.
The contribution limits for an FSA vary from year to year and are subject to plan terms. For the 2025 tax year, employees can contribute up to $3,300.
