What is FSA?
A Flexible Spending Account (FSA) is a special financial account that allows individuals to set aside money for medical expenses. FSAs are typically sponsored by employers in an employees benefits package and can help individuals save on out-of-pocket healthcare costs. Funds from an FSA are used to help pay for qualified healthcare costs.
Unlike other savings accounts, FSAs operate on a “use-it-or-lose-it” basis. Funds must be spent either within the plan year or during a grace period, if offered. Understanding how FSAs work and their benefits can help you maximize your healthcare spending and save money.
How Does an FSA Work?
An FSA is funded through payroll deductions, which allows employees to contribute pre-tax income to their accounts. These contributions also reduce taxable income, effectively lowering the individual’s overall tax burden.
Once the funds are deposited, they can be used to cover eligible healthcare costs. Most FSAs provide participants with a debit card for easy access to funds. Some FSA providers have participants submit receipts for reimbursement. However, it’s important to carefully track expenditures to ensure compliance with IRS guidelines for eligible expenses.
Who Can Contribute to an FSA?
FSAs are primarily funded by employees through payroll deductions. Employees decide how much to contribute during their employer’s open enrollment period, with annual contribution limits set by the IRS. For 2025, the maximum contribution limit is $3,050, although this amount is subject to change annually.
Employers may contribute to their employees’ FSAs, although this is not a requirement. Employer contributions do not count toward the employee’s annual contribution limit, which can provide additional financial support for healthcare expenses.
Spouses can also contribute towards an FSA, however spouse contributions count towards the annual limit. If both spouses have an FSA, the joint annual limit is $6,600.
It’s important to note that FSAs are only available to employees of organizations that offer them. Self-employed individuals are not eligible to participate in an FSA but may explore other tax-advantaged healthcare savings options, such as a Health Savings Account (HSA).
What Can an FSA Cover?
FSAs are designed to cover a wide range of healthcare-related expenses, including but not limited to:
- Medical co-pays and deductibles
- Prescription medications
- Over-the-counter medications (with a prescription in some cases)
- Vision care (glasses and contact lenses)
- Dental treatments (fillings, cleanings, braces)
For a complete list of qualified expenses, consult IRS Publication 502 or your employer’s FSA administrator.
Benefits of a Flexible Spending Account
An FSA offers several advantages, including:
- Tax Savings: Contributions are made pre-tax, reducing taxable income.
- Convenience: Funds are accessible for a wide range of healthcare expenses.
- Employer Contributions: Some employers may contribute to employees’ FSAs, increasing savings potential.
While FSAs provide significant financial benefits, it’s essential to budget contributions carefully to avoid forfeiting unused funds at the end of the plan year.
FSA vs. HSA: What’s the Difference?
FSAs and Health Savings Accounts (HSAs) are often confused, but they differ in key ways. Unlike FSAs, HSAs are tied to high-deductible health plans (HDHPs) and allow unused funds to roll over annually. FSAs, on the other hand, are not linked to specific health plans and typically have stricter spending deadlines.
How do I Get Started with a Flexible Spending Account?
To enroll in an FSA, check with your employer during your benefits enrollment period. Determine your anticipated healthcare expenses for the year and set a contribution amount. Remember, it’s better to underestimate slightly to avoid losing funds.
If you have questions about managing your FSA, consult your HR department or the account administrator.
Is an FSA Right for You?
An FSA can be an excellent tool for managing healthcare expenses while reducing taxable income. By understanding how it works and planning your contributions wisely, you can make the most of this valuable benefit.
If you’re ready to take control of your healthcare spending, consider enrolling in an FSA during your employer’s next open enrollment period. If you have any additional questions about FSAs or your health coverage, get in touch. We are here to advocate for your health coverage.
