What Is a Flexible Spending Account (FSA)?

What is a Flexible Spending Account?

A Flexible Spending Account (FSA) is a tax-advantaged account offered through an employer that helps employees pay for eligible out-of-pocket healthcare expenses.

Employees elect an annual contribution amount during open enrollment or after a qualifying life event. That amount is generally deducted from each paycheck before taxes are withheld.

The money can then be used to reimburse qualified medical expenses incurred during the plan year.

Unlike a Health Savings Account (HSA), an FSA is tied to your employer and is subject to specific IRS rules regarding eligibility, contributions, and the use of funds.

How does an FSA work?

When you enroll in an FSA, you choose how much money you want to contribute for the upcoming plan year, up to the annual IRS contribution limit.

Throughout the year:

1. Your employer deducts pre-tax contributions from your paycheck.
2. You incur qualified medical expenses.
3. You submit eligible expenses for reimbursement or use an FSA debit card if one is provided.
4. Reimbursements are generally tax-free when used for qualified medical expenses.

For most healthcare FSAs, your full annual election is generally available at the beginning of the plan year, even though payroll deductions occur throughout the year.

What expenses can an FSA pay for?

Qualified medical expenses are defined by the Internal Revenue Service and generally include:

• Deductibles
• Copayments
• Coinsurance
• Prescription medications
• Doctor visits
• Dental treatment
• Vision exams
• Eyeglasses and contact lenses
• Hearing aids
• Medical equipment
• Certain over-the-counter medications and menstrual care products, as permitted under federal law

IRS Publication 502 provides detailed guidance on qualified medical expenses.

Who is eligible for an FSA?

Healthcare FSAs are generally available only through employers that choose to offer them.

To participate, an employee typically must:

• Work for an employer that sponsors an FSA.
• Elect participation during the enrollment period or after a qualifying life event.
• Meet any eligibility requirements established by the employer's benefits plan.

Self-employed individuals generally cannot establish a healthcare FSA unless they are employees of a business that offers one.

What happens if you don't use all your FSA money?

One of the most important features of an FSA is the "use-it-or-lose-it" rule.

In general, unused funds remaining at the end of the plan year may be forfeited.

However, IRS rules allow employers to choose one of two optional features:

• A limited carryover of unused funds into the next plan year, up to the IRS maximum.
• A grace period after the end of the plan year during which remaining funds may still be used.

An employer cannot offer both options for the same healthcare FSA.

Because employer plan designs differ, employees should review their specific benefits documents.

FSA vs. HSA

Flexible Spending Accounts and Health Savings Accounts both provide tax advantages, but they operate differently.

Flexible Spending Account (FSA)

• Available only through an employer.
• Employer-sponsored benefit.
• Generally subject to use-it-or-lose-it rules, although limited carryovers or grace periods may apply.
• Usually does not transfer when employment ends.

Health Savings Account (HSA)

• Requires enrollment in an HSA-eligible High Deductible Health Plan.
• Owned by the individual.
• Funds generally roll over indefinitely.
• Remains with you if you change jobs or retire.

Choosing between an FSA and an HSA depends on your health plan, employer benefits, and individual financial goals.

FSA vs. Health Reimbursement Arrangement (HRA)

These employer-sponsored benefits are also different.

Flexible Spending Account

• Primarily funded through employee salary reduction contributions.
• Employee elects an annual contribution amount.
• Subject to annual IRS contribution limits.

Health Reimbursement Arrangement (HRA)

• Funded entirely by the employer.
• Employees generally cannot contribute their own money.
• Employer determines reimbursement rules and eligible expenses.

Why this matters

A Flexible Spending Account can lower your taxable income while helping pay predictable healthcare expenses such as prescriptions, dental care, vision care, and office visits. Understanding how the account works—and planning your annual contributions carefully—can help you maximize its tax advantages while minimizing the risk of unused funds.