FSA (Flexible Spending Account)
An employer-sponsored account that lets you set aside pre-tax dollars for medical expenses or dependent care. Unlike HSAs, FSAs generally have a use-it-or-lose-it rule.
A Flexible Spending Account (FSA) is an employer-provided benefit that allows you to contribute pre-tax dollars to pay for eligible medical expenses (Healthcare FSA) or dependent care costs (Dependent Care FSA). Contributions reduce your taxable income and are not subject to FICA taxes, saving you both income tax and payroll tax.
For 2025, the Healthcare FSA contribution limit is $3,300. The Dependent Care FSA limit is $5,000 per household ($2,500 if married filing separately) — rising to $7,500 ($3,750 MFS) starting in 2026 under the One Big Beautiful Bill Act (OBBBA). These limits are set during your employer's open enrollment and cannot generally be changed mid-year unless you have a qualifying life event.
The main drawback of an FSA is the use-it-or-lose-it rule: unspent funds at the end of the plan year are forfeited. However, employers may offer either a grace period of up to 2.5 extra months to spend remaining funds, or a carryover of up to $660 (in 2025) to the next year, but not both. You cannot have both an HSA and a general-purpose Healthcare FSA simultaneously, though Limited Purpose FSAs for dental and vision are allowed.
How it works
An FSA is an employer-sponsored account that lets you set aside pre-tax salary for eligible medical expenses (Healthcare FSA) or dependent care costs (Dependent Care FSA), separate from any HSA. Contributions reduce not just your income tax but also your FICA payroll tax, since the money is deducted before either tax applies — a benefit an above-the-line IRA or HSA deduction taken at filing time doesn't provide, since payroll taxes are already withheld by then. For 2025, the Healthcare FSA limit is $3,300.
You elect your FSA contribution amount once a year during your employer's open enrollment, and it's deducted evenly from each paycheck regardless of how much you've actually spent so far — the full elected Healthcare FSA amount is generally available to you from early in the plan year, even before you've contributed all of it. You submit receipts or use an FSA debit card to pay for eligible expenses like copays, prescriptions, and dependent care.
The defining risk of an FSA is the use-it-or-lose-it rule: money you don't spend by the end of the plan year is forfeited back to your employer, unlike an HSA balance which simply carries over. Employers can soften this with either a grace period of up to 2.5 extra months to spend remaining funds, or a limited carryover of up to $660 for 2025 into the next year, but not both at once. You also cannot have both an HSA and a general-purpose Healthcare FSA in the same year, though a Limited Purpose FSA for dental and vision expenses is compatible with an HSA.
Example: FSA use-it-or-lose-it risk
An employee elects $2,400 for their Healthcare FSA at open enrollment, spread across $200 deducted from each of 12 paychecks. By November they've only used $1,600 on copays and prescriptions, leaving $800 unspent with the plan year ending December 31.
If their employer's plan offers the 2.5-month grace period, the employee has until roughly mid-March to spend the remaining $800 on eligible expenses. Without a grace period or carryover provision, any amount still unspent after the plan year ends, up to the full $800, is forfeited.
Frequently asked questions
What happens to unused FSA money at the end of the year?
Can I have both an HSA and an FSA?
How much can I contribute to a Dependent Care FSA?
Related Terms
HSA (Health Savings Account)
A triple-tax-advantaged savings account for medical expenses, available with high-deductible health plans. Contributions are tax-deductible, growth is tax-free, and qualified withdrawals are tax-free.
Above-the-Line Deduction
Deductions subtracted from gross income to arrive at AGI, available regardless of whether you itemize. Examples include IRA contributions, student loan interest, and HSA contributions.
FICA
Federal Insurance Contributions Act taxes that fund Social Security (6.2%) and Medicare (1.45%). Both employees and employers pay FICA, totaling 15.3% on wages.