A flexible spending account (FSA) is a special employer spending account. It allows a person to use tax-free money on health-related expenses such as prescription medications and medical devices.
An FSA allows a person to contribute a portion of their income to a tax-free account. This lowers their total tax responsibility for the year. People can use this special account to pay for certain out-of-pocket medical expenses.
While an FSA can provide several benefits, an individual must often consider some limitations. For example, depending on the plan, a person cannot carry very much unused money to the next year. There are also caps on the amount a person can set aside.
This article reviews what an FSA is, how it works, the coverage, and possible limits. We also look at examples of an FSA plan, how to set up an account, and frequently asked questions.
We may use a few terms in this piece that can be helpful to understand when selecting the best insurance plan:
- Deductible: This is an annual amount that a person must spend out of pocket within a certain time period before an insurer starts to fund their treatments.
- Coinsurance: This is a percentage of a treatment cost that a person will need to self-fund. For Medicare Part B, this comes to 20%.
- Copayment: This is a fixed dollar amount that an insured person pays when receiving certain treatments. For Medicare, this usually applies to prescription drugs.
An FSA is a tax-free account a person can use to pay for out-of-pocket medical expenses. Employers set up the accounts for their employees and have some control over aspects of the account, such as:
- the amount a person can set aside
- the amount a person can carry over into a new year
- whether the employer will contribute additional money
People can often access the money through a card connected to the account. They can use the card to pay for various health-related expenses using untaxed income.
An FSA is available only through a participating employer. People can save up to $3,050 per year per employer. A person’s spouse can contribute an additional $3,050 per year through their employer.
An employer may contribute to an FSA plan, but they do not need to. They also do not have to offer an FSA if they choose not to.
Additionally, the employer can decide how to handle year-end balances. In most cases, people must spend the money they have set aside because it will not carry over into a new year. However, an employer can choose one of two options:
- allowing a “grace period” of up to 2.5 extra months to use the money from the previous year
- allowing employees to carry over up to $610 per year to use in the following year
Employees can contribute as much or little as they like, up to the $3,050 cap per year. This amount may change each year, so a person should check the current year’s limit with their employer.
People can use the money in their FSA as soon as it becomes available. They can use it in one of two ways:
- A connected card: An employer will provide a card to use at locations such as pharmacies and doctor’s offices.
- Submission of bills or receipts to the FSA program: If an expense, such as the purchase of medical equipment, does not accept the FSA card, a person can submit a receipt for reimbursement from their FSA.
People can use an FSA to pay a wide variety of health-related expenses that insurance does not cover. Examples of services and equipment people can pay for with an FSA include:
- copays for doctor’s visits
- prescription or over-the-counter medications
- dental procedures
- medical equipment, such as:
- diabetes supplies
One advantage is that the full amount of money set aside is available on the first day the FSA becomes active. This may allow a person to pay for a large expense, such as braces, early in the year using their FSA account.
Though an FSA can help cover various medical expenses, a person should consider the limitations and exclusions.
For example, a person cannot use FSA funds to cover the cost of insurance premiums. This means people will need to pay for their insurance coverage through taxable dollars, typically taken directly from their paychecks.
When a person decides to contribute to an FSA, they may want to spend additional time planning how much they will need. They may wish to consider:
- whether they have monthly medications
- whether they need to see a doctor regularly for checkups for preexisting conditions
- whether anyone in their family needs unusual medical procedures or equipment, such as braces, this year
- how many times they may need to pay for contacts or glasses
- how much they should set aside for possible emergencies
The reason for the planning is that only a small amount — currently $650 — can carry over to the next year. Some employers allow people only 2.5 extra months to spend any money they have left from the previous year. Otherwise, that money goes away.
People should ask their employer what will happen to any unused FSA money at the end of the year and plan according to their needs. A person cannot typically change their contribution amount once enrolled, except in special circumstances, such as:
- birth of a child
People with a Marketplace account cannot sign up for an FSA account. Instead, they can use a health savings account (HSA) if they have a high deductible insurance plan. An HSA allows a person to set aside untaxed money to cover medical expenses.
An employer may enroll in three types of FSA plan:
- Health Care FSA: This covers any eligible medical expense and allows a contribution of up to $3,050 annually.
- Limited Expense Health Care Account FSA: This account covers vision- and dental-related expenses and allows a contribution of up to $3,050 per year.
- Dependent Care FSA: This covers costs related to dependent care for children or adults and allows a contribution of up to $5,000 per household.
A person can contribute to an FSA if their employer offers this benefit.
Though the process may vary by employer, people generally need to speak with the person who sets up healthcare for their employer or a human resources representative. They will typically provide information related to the following:
- how much the employee can contribute
- whether any funds can carry over
- whether the employee has an additional 2.5 months to use the funds
- whether the company contributes any funds
- when enrollment starts and ends for the year
Typically, a person can sign up only during an employer’s open enrollment for healthcare plans. Once a person has enrolled and chosen a contribution amount, they cannot make changes until the next open enrollment period.
The following section provides answers to frequently asked questions about the FSA.
FSA vs. HSA
FSA and HSA are similar programs. They allow a person to set aside untaxed income for qualifying medical expenses.
The main difference is who can set up each account. An FSA requires an employer to sign up for the program and allow employees to contribute to it.
An HSA, on the other hand, is available to people who enroll in a high-deductible health plan through the Marketplace. An HSA also differs from an FSA in that it allows:
- contributions of up to $3,650 for self-only coverage and up to $7,300 for family coverage
- carryover of funds from year to year
- possible interest on the tax-free accounts
FSA vs. MSA
A medical savings account (MSA) is another way to set aside money for medical expenses. While an FSA is tax-free and allows only limited carryover of funds, an MSA differs in the following ways:
- It provides tax-deferred savings to accumulate money to cover future medical expenses.
- It allows lump sum or regular contributions from a person or employer.
- A person must pair it with a major medical health plan (“catastrophic plan”) with a high deductible.
An FSA allows employees to use untaxed income to pay for their medical expenses during the enrolled year. They can use it for deductibles, copays, medications, and medical devices.
While an FSA is potentially helpful for some, a person should consider the plan’s limitations. Most money a person has set aside will not carry over to a new year, and not all employers participate. Additionally, people cannot use FSA funds to pay their insurance premiums.
A person can generally enroll through their employer during an open enrollment period. They should talk with their employer to see whether and how they can participate. Once a person has signed up, they cannot change their contributions for the year, except in circumstances such as marriage, death, or the birth of a child.