A flexible spending account for healthcare, also called a flexible spending arrangement or FSA, allows you to save pre-tax money for medical expenses. But you need to understand the rules and qualifications to make it work for you.
An HCFSA is part of an employer benefits plan. If offered, you typically set this up during your company’s annual open enrollment for the upcoming subscription year. Once you enroll, your employer will deduct the amount you choose from your paycheck, and the money will be deposited into a special account. You file a claim and receive compensation if you pay the medical costs yourself. The refund is tax-free as long as the costs are FSA eligible.
To qualify for an HCFSA, you must work for an employer that offers it. Self-employed persons are not eligible. You also don’t qualify for a health care FSA if you have a health savings account (HSA).
You contribute to your FSA with pre-tax income, money that isn’t hit by federal income tax or payroll taxes. This lowers your tax bill by lowering your taxable income. Your employer can also contribute to your FSA, accelerating your savings. The Internal Revenue Service (IRS) treats employer and employee contributions the same; neither counts towards your income.
You can contribute up to $3,300 to your FSA for 2025 – an increase of $100 from 2024. If your spouse has an FSA, you can each set aside the maximum for your FSAs, totaling $6,600 for your household. The annual contribution limit only applies to payroll deductions, so employer contributions will not affect your annual limit.
The IRS has rules about how and when you should use your FSA funds, but it’s also worth checking the details in your employer plan.
You, your spouse, and dependents generally can use FSA funds for medical and dental expenses not covered by your health plan. FSA-approved charges are for treating or preventing a physical or mental condition, not for general care such as vitamins or spa treatments. Eligible expenses may include:
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Medical, dental, and vision costs not covered by your health insurance, such as doctor co-pays, coinsurance, and deductibles.
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Prescription drugs and over-the-counter drugs.
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Additional healthcare items related to a medical condition, such as bandages, reading glasses and prescription glasses, heating pads and pregnancy tests.
Everyday items used regardless of a medical condition are usually not eligible for the FSA. This includes items such as floss, vitamins and cosmetics. You also can’t use FSA money for health insurance premiums or long-term care.
There are two ways to use your FSA money. You can pay for healthcare costs out of pocket and get reimbursement from your FSA by filing a claim.
You may also receive a debit card linked to your FSA that can be used to pay medical expenses directly. This way you don’t have to take care of the costs and wait for your refund.
You will lose any unused funds at the end of the calendar year unless your employer allows an FSA grace period or a carryover.
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Grace period: Your employer can let you use the previous year’s money for qualified expenses you incurred that year, up to 2.5 months in the following year.
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Transfer: In 2025, you may be able to use up to $640 of your 2024 balance.
Because an FSA is an employee benefit, you also lose your FSA balance if you leave the company.
You may have other ways to save, depending on your employer’s benefits. Here are additional tax-advantaged accounts to consider.
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Dependent Care FSA: Save pre-tax dollars to cover eligible child care expenses and other dependent care costs while you work. This may include child care, before and after school programs, summer day camps, and elder care.
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Health Savings Account (HSA): If you have a high deductible insurance plan (HDHP), you are eligible for an HSA. Contributions are tax deductible and reserved for eligible medical expenses. Unlike an FSA, you don’t need an employer to participate, and you can leave your savings for as long as you want, investing it to grow and use tax-free during retirement.
Read more: HSAs — A retirement plan for your health care
Money in an FSA account does not transfer. At the end of the plan year, you will lose any money left in your account unless your employer offers a grace period or transfer. A grace period allows you to access your FSA funds for up to 2.5 months into the new year. If your employer offers a rollover, you can roll over up to $640 of your balance from 2024 to 2025.
You are eligible for a health care FSA if your employer offers one. Generally, you cannot have a health care FSA and an HSA. If you are a highly paid employee, additional rules apply.
What is the difference between an HSA and an FSA?
Both HSAs and FSAs build pre-tax savings for eligible health care costs. Usually you can’t participate in both. FSAs are only offered through an employer, and you typically must use the money before the end of the year. HSA funds are yours no matter where you work. You can use the money for current year’s medical expenses or invest it to grow over time and take it out – tax-free – to pay for medical care after age 65.
What is the difference between an HRA and an FSA?
An HRA or health reimbursement account is similar to a health care HSA in that it is money you can use for qualified medical expenses. But HRA funds are contributed by your employer, not you. They can be carried over from year to year, but you will lose them if you leave your job.