Key takeout
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A flexible spending account (FSA) is an employer-sponsored tax account used to pay eligible health care or dependent care costs.
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FSA contributions are made in pre-tax dollars and could potentially save 30% on eligible expenses.
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In 2025, you can donate up to $3,300 to the Healthcare FSA and $5,000 to the dependent care FSA.
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FSA funds usually need to be used by the end of the planning year. Otherwise, you will be confiscated (“using or losing”).
A flexible spending account (FSA) is a tax savings account that allows you to secure pre-tax dollars to pay for eligible medical or dependent care expenses. Unlike Health Savings Accounts (HSAs), FSAs are sponsored and owned by employers, making them an attractive advantage for employees looking to reduce taxable income while covering out-of-pocket expenses.
FSAs make most sense if you have predictable health or dependent care costs and want to reduce your current taxable income, and are satisfied with the “use or lose” requirement.
How does a flexible spending account work?
Registering with an FSA through your employer will determine how much you will contribute to that year during your open registration. This amount is evenly divided across your salary and deducted before taxes are calculated, reducing your overall taxable income.
Here’s how the process works:
- Registration: Up to federal restrictions, select your annual contribution amount during the employer’s open enrollment period.
- Funding: The selected amount is automatically deducted from each payroll prior to tax, providing immediate tax savings.
- access: You can use your FSA fund year-round at eligible costs even if you haven’t given the full amount yet.
- Refund: Please send a receipt for eligible expenses to get a refund or use an FSA debit card if your employer provides it.
According to the federal FSA program, participants save an average of 30% of their healthcare costs due to tax benefits.
As a starting point for FSA’s contribution, we recommend estimating healthcare costs for the previous year. Total costs for prescription copey, dental cleaning, visual examinations, and more. Unused funds are usually confiscated at the end of the year, so it is recommended to be slightly conservative.
– Hanna Horvath, CFP & Bankrate Managing Editor
Flexible Expense Account Types
There are two main types of FSAs, each designed for different categories of costs.
Healthcare FSA (HCFSA)
Healthcare FSA covers medical, dental and vision costs that are not paid by insurance plans. This includes:
- Prescription and over-the-counter medicines (with prescription)
- Dental Cleaning and Treatment
- Vision test and prescription glasses or contacts
- Physical Therapy and Medical Equipment
- Bandages, pregnancy test kits, and other medical supplies
important: You cannot use Healthcare FSA funds for premiums. Only out-of-pocket fees are eligible.
Dependent Care FSA (DCFSA)
Dependent care FSA helps cover the costs of caring for children under the age of 13 and dependents who are unable to care for themselves. The applicable costs are as follows:
- Daycare and preschool costs
- After-school care
- Summer camping (but not overnight camping)
- Adult Day Care for Qualified Dependants
- Babysitter costs that allow you to work
For a complete list of eligible costs, please visit the IRS FSA Eligibility Guidelines.
It is also possible to spend more than what is currently available in FSA to cover costs, as long as contributions set by the end of the year increase with these costs.
Employers may also contribute to the employee’s FSA, but not necessary.
FSA contribution limits for 2025
Healthcare FSA: You can donate up to $3,300 a year. If you are married, your spouse can also donate up to $3,300 to your FSA.
Dependent Care FSA: The biggest contribution is $5,000 a year when submitted jointly by an individual or married couple.
Employer contributions count towards these limits, but employers do not need to contribute to the FSA.
What happens to unused FSA money?
The FSA works on a “use or lose” basis. This means that unused funds are usually confiscated at the end of the year. However, some employers offer flexibility through:
- Blessing Period: Up to 2.5 months to use the remaining funds
- Carryover options: Unused Healthcare FSA funds up to $660 can roll over in the next planning year
Check with your HR department to understand your employer’s specific FSA policy.
FSA vs HSA: Important Differences
Both accounts offer the tax benefits of medical expenses, but they vary widely.
| Features | FSA | HSA |
|---|---|---|
| Owned | Owned by the employer | Employee Owned |
| Portability | Lost when I changed jobs | I’ll be with you |
| Contribution Limitations (2025) | $3,300 (Healthcare) | $4,300 (individual), $8,550 (family) |
| Fund Rollover | Limited or none | Unlimited |
| Interest income | no | yes |
| Qualifications | Employers who provide FSAs | You need a high-cost health plan |
Learn more about the differences between HSA and FSA.
Can I have both an FSA and an HSA?
In general, you cannot have both a healthcare FSA and an HSA at the same time. The exception is a limited purpose FSA, which covers only dental and vision costs and can complement HSA.
This combination expects significant dental or vision costs that could exceed the HSA balance and expects to be able to pay these costs even before fully funding the HSA.
Strong Points
- FSA contributions reduce taxable income and offer immediate savings, not subject to payroll tax.
- Even if you haven’t contributed to the full amount yet, you can use your annual FSA allocation right away.
- Some employers contribute to employee FSAs, but this is not required.
- Regular pay deductions help you budget for your healthcare expenses throughout the year.
Cons
- Unused funds are usually confiscated at the end of the year and require careful planning.
- FSA funds cannot invest and earn no interest.
- If you leave your employer because your account is not portable, you will forfeit the FSA fund.
- The contribution amount must be determined during open registration and is not normally possible to change it in the middle of the year.
Conclusion
Flexible spending accounts can be a valuable tool for managing healthcare and dependency care costs while reducing tax burdens. The key is to accurately estimate annual costs to maximize benefits without confiscating unused funds.
If you want more flexibility and investment options, consider whether you qualify for an HSA instead. For those with predictable costs and discipline to use funds within a planning year, FSA offers immediate tax savings and convenient cost management.