What Is an FSA and How Do I Use It?  

Saving money for the future is a good way to help protect your financial health and stay prepared. When it comes to planning for medical costs, there are dedicated accounts available to employees that can help offset some of the costs of healthcare, like flexible spending accounts (FSA).

An FSA is an employer-sponsored savings account you can use to help make out-of-pocket healthcare expenses more manageable. FSAs are tax-advantaged accounts, which means you can make pre-tax contributions to the account and spend the money tax-free.

Learn more about FSAs and how they can help you save and pay for qualified expenses.

How does an FSA work? 

A flexible spending account — or flexible spending arrangement — lets account holders deduct pre-tax money directly from their paychecks to save for qualified healthcare expenses.¹ FSA funds can be used to pay for things like deductibles, co-pays, and doctor visits for you, your spouse, and qualifying dependents. Employers can also contribute to an employee’s FSA but they aren’t required to do so. 

There are typically three ways to access your FSA money. You can use a smart debit card connected to your account, pay providers directly through your online portal, or submit receipts for reimbursement. Check with your employer to find out which options they offer.

FSA eligible expenses 

FSAs can be used to cover the costs of various medical, dental, and vision expenses — as long as they’re qualified.

Here are some examples of qualified, out-of-pocket expenses you can use an FSA for:

• Acupuncture
• Ambulance services
• Band-aids
• Birth control
• Blood pressure monitor
• Body scans
• Chiropractic care
• Cholesterol test kit
• COVID-19 PPE (hand sanitizers, wipes, and masks for personal use)
• Co-insurance
• Deductibles
• Dental care
• Diagnostic services
• Eye exams
• Eyeglasses
• Eye surgery
• First aid kits
• Hospital services 
• Immunizations
• Laboratory fees
• Laser eye surgery
• Medical testing devices
• Menstrual care products
• Nursing services
• Office visits

For a complete list of eligible expenses, review Internal Revenue Service (IRS) Publication 502.

FSA eligibility 

To be eligible for an FSA, you need to work at a company that offers FSAs as part of their employee benefits. Generally, employees don’t need to be enrolled in a health insurance plan to open an FSA.

If you have a health savings account (HSA), you may not be eligible for a general healthcare FSA, because they're used to pay for the same types of medical expenses. However, there are specialty FSAs — i.e., limited purpose FSA (LP-FSA) and dependent care FSA (DC-FSA) — that you can use in conjunction with an HSA. 

Types of FSAs 

Some employers may offer LP-FSAs and DC-FSAs. These types of accounts suit specific needs, while a healthcare FSA is a general-purpose account. Covered expenses, HSA compatibility, and plan details differ depending on the type of FSA you have.

Healthcare FSA 

A healthcare FSA is a standard FSA that can be used to help cover medical, dental, and vision expenses. 

For 2023, contribution limits for a healthcare FSA are $3,050, with a maximum of $5,000 per household or $2,500 for married couples filing separately.³

Healthcare FSAs can’t be used in conjunction with an HSA or high deductible health plan (HDHP).

Limited purpose FSA (LP-FSA)

A limited purpose FSA is similar to a standard FSA, except it can only be used to help cover qualified dental and vision expenses — medical expenses generally aren’t covered.

For 2023, contribution limits for a LP-FSA is $3,050, with a maximum of $5,000 per household or $2,500 for married couples filing separately.³  

LP-FSAs can be used in conjunction with an HSA and HDHP. You might be able to maximize your savings when you pair a LP-FSA with an HSA.⁴ For example, it can promote more tax-free account growth and allow you to save the full annual maximum in your HSA.

Dependent care FSA (DC-FSA)

A dependent care FSA is used to pay for qualified medical expenses for dependents. A dependent is defined as children under age 13 and adults who are physically or mentally unable to take care of themselves.⁵ Eligible expenses could include things like child care, after-school programs, and senior daycare.

For 2023, the contribution limit for a DC-FSA is $5,000 per household or $2,500 for married couples filing separately.³

DC-FSAs can be used in conjunction with an HSA and HDHP. Contributing to both accounts can help lower your taxable income.⁶

FSA: Benefits and limitations 

Having an FSA comes with multiple advantages such as saving on taxes. But FSAs can also have disadvantages, like “use-it-or-lose-it” restrictions and lower contribution limits. 

Consider the following benefits and limitations of an FSA:

Benefits 

• Contributions aren’t subject to tax: The funds you contribute to an FSA are deducted from your paycheck and aren’t subject to employment or federal income tax.⁷
• Employers can contribute: Your employer can make contributions to your FSA, though they aren’t required to do so.
• Money can be used on everyday items: You can use your FSA funds to pay for day-to-day items, such as sunscreen, band-aids, and menstrual care products.
  
• Funds are easy to access: Withdrawing money from your account is fairly simple. With an FSA debit card or online portal, you can easily access your FSA funds. 

Limitations 

• Funds typically need to be used by the end of the year: Unused funds in an FSA will generally need to be used by the end of the plan year, or they’re forfeited. However, some employers may offer a 2.5 month grace period to allow you extra time to use the money. Or employers might let you roll over unused funds up to a certain amount. As of 2023, you can roll over a maximum of $610 of unused funds.⁸ But not all employers will offer these options. 
• Accounts aren't portable: FSAs are owned by employers, not employees. This means if you leave your job or get terminated, you typically won’t be able to take the money in your FSA with you. 
• Your employer has to offer it: If you’re self-employed or your employer doesn’t offer FSAs, you won’t be able to open one.
• Lower contribution limits: FSAs have the lowest annual contribution limits compared to other tax-advantaged savings accounts, such as HSAs and health reimbursement arrangements (HRAs).

FSA vs. HSA 

Both an FSA and an HSA can help you pay for medical care while saving on taxes, but there are some key differences.

Here are a few ways FSAs and HSAs differ: 

• HSAs are owned by an individual, not an employer.
• HSAs are available to anyone with an HDHP and don’t need to be set up by an employer.
• Funds in an HSA aren’t subject to use-it-or-lose it mandates and can be rolled over to the following plan year.
• Money in an HSA can be invested or earn interest — FSA funds can’t be used this way.
• Money in an HSA is portable and goes with you if you change employers.

Is an FSA right for me? 

If your employer offers an FSA, you may want to consider opening one for its potential health and financial benefits. But first, make sure it's the right choice for you and your situation. 

Think about your finances and priorities to decide if you’ll reasonably be able to contribute enough to an FSA to make it worthwhile. If you’re often paying out of pocket for medical expenses, an FSA can save you money in the short and long term.