Guide to FSAs: Overview of Types, Uses, and Requirements

Jenius Bank Team2/2/2024 • Updated 1/10/2025

A doctor holding an illustration of a piggy bank.

Flexible Spending Accounts may help you pay for certain medical expenses with pre-tax money.When it comes to your total compensation at work, you're probably familiar with benefits like 401(k) matching and healthcare coverage. However, a Flexible Spending Account, or FSA, is perhaps a lesser-known benefit that you may have and want to consider. Subject to certain limitations, FSAs allow you to set pre-tax money aside from your paycheck for specific expenses, possibly reducing your overall taxable income.This guide gives an overview of how FSAs work and the different types of FSAs that may be available to you. This information is not tax or investment advice. You should consult with a tax advisor and/or a qualified investment professional for advice specific to your particular circumstances.

Key Takeaways

FSAs are a type of savings account that allows you to set pre-tax money aside for certain out-of-pocket health care costs up to certain limits.
FSA withdrawals used for qualified expenses, as defined by the IRS, aren’t subject to taxes.
Money in an FSA must be used by the end of the plan year, but employers could offer a grace period or a rollover amount.

What is an FSA?

An FSA is an account many employers offer to help employees save (and pay) for qualifying expenses—usually related to healthcare. Using these accounts may help you be smarter about managing your money and encourage you to plan for these expenses. Contributions to an FSA are deducted from the employee's paycheck on a pre-tax basis, which means that the funds aren't subject to payroll or income taxes as long as they are used according to the program's rules.An employee usually selects the FSA benefit during their annual open enrollment period, which typically takes place between mid-October and mid-December, depending on the benefits plan.¹If your company offers an FSA and you’re interested in opening one, reach out to your HR department or benefits manager for more information. If you’re curious about the potential tax benefit for you, be sure to contact your tax advisor.

How FSAs Differ from HSAs

Both FSAs and HSAs let you contribute pre-tax dollars to help cover medical expenses, but they work in different ways. FSAs are tied to your employer and must be used by the end of the year. Otherwise, you risk losing out on the money you contributed to the account. On the other hand, Health Savings Accounts (HSAs) are accounts you own. If you move to a different employer, you could keep your HSA and the money you have in it. Furthermore, the money you contribute to a HSA doesn't expire, meaning you're free to use it years after contributing if you still have funds in the account.That said, FSAs may be more flexible. You're able to enroll in an FSA regardless of the type of health insurance plan you have. HSAs require you to be on a qualifying high-deductible health insurance plan.

	Health Savings Account (HSA)	Flexible Spending Account (FSA)
Contribution Limits	$4,300 per individual and $8,550 per family in 2025	$3,200 in 2024, $3,300 in 2025
Eligibility	Must be enrolled in a high-deductible health insurance plan	Must be an eligible employee per IRS regulations
Ownership of the Account	Individual owns the account and can take the account with them when leaving an employer	Employer owns the account. Employee forfeits the FSA if they leave.
Rollover Opportunity	Funds roll over each year	Funds expire at the end of the year (after applicable grace period)
Modifications to Contribution Amounts	Adjustments to contribution amounts are generally allowed.	Contributions are locked in until a qualifying event happens.

FSA Contribution Rules

The IRS sets annual contribution limits for FSAs, which vary depending on the FSA type. But employers themselves could set lower limits if they choose.² We’ll discuss these limits when we talk about the different FSA types in a moment. Additionally, some employers may contribute to your FSA as part of your total compensation.³Employer contributions don’t count against the contribution limits but are subject to other limitations and requirements.⁴In addition to annual contribution limits, there are a few other rules to keep in mind with FSAs.

Use It or Lose It

As mentioned, most FSAs have a use-it-or-lose-it rule, meaning any funds left in the account at the end of the plan year (typically December 31) may be forfeited. Some employers may offer “grace periods” of up to 2.5 months to use the money in your FSA or allow you to carry over up to $660 per year to use the following year.⁵

Contribution Amounts

FSAs have minimum annual election amounts, meaning you’re required to contribute at least $100 per year to the account.⁶ These contributions, made on a pretax basis, may help reduce your overall tax liability—potentially saving you money. As always, it’s important to discuss your specific situation with a tax adviser. It’s also important to note that you can’t change your FSA contribution amount on a whim. Since you need to estimate your annual healthcare costs in advance to help you contribute an appropriate amount to your FSA, you’re often encouraged to be more intentional about your money management and budget for the upcoming year. During your employer’s open enrollment period, you may be able to make changes to your FSA contributions for the upcoming year. However, once the enrollment period ends and you’ve set your contribution amount for the year,⁷ it’s typically not adjustable unless you experience a qualifying life event, such as getting married or having a child.⁸If you have additional questions about these rules, reach out to your company’s benefits manager.

Types of FSAs

While you’re probably most familiar with Health Care Flexible Spending Accounts (HCFSA), there are actually a few different types of FSAs that allow funds to be used for different purposes.

Health Care Flexible Spending Accounts (HCFSA)

HCFSAs are the most common type of FSAs and allow you to use the funds for eligible medical expenses. It’s reported that American families spend over five percent of their household income on out-of-pocket healthcare costs each year.⁹The 2025 contribution limit for HCFSAs is $3,300 per employer.¹⁰ If you’re married, your spouse may put up to $3,200 in an HCFSA with their employer as well.¹¹Some common uses for HCFSA funds include:¹²

Medical expenses - copays, coinsurance, and deductibles
Dental expenses - exams, cleanings, X-rays, and braces
Vision expenses - exams, contact lenses and supplies, eyeglasses, and laser eye surgery
Professional services - physical therapy, chiropractor visits, and acupuncture
Certain medications - prescription medications and prescribed over-the-counter medications
Over-the-counter health care items - bandages, pregnancy tests, and blood pressure monitors

Be sure to check your specific HCFSA plan to ensure you’re using your funds for eligible expenses.

Limited Expense Health Care FSA (LEX HCFSA)

LEX HCFSAs often work in partnership with HCFSAs, as these funds may be used for specific dental and vision expenses. The 2025, contribution limit for LEX HCFSAs is $3,300 per employer.¹³ If you’re married, your spouse may put up to $3,300 in a LEX HCFSA with their employer as well.¹⁴Some common expenses that LEX HCFSA funds may be used for include:¹⁵

Vision exams
LASIK surgery
Contact lenses
Eyeglasses
Dental cleanings, X-rays, fillings, and crowns
Orthodontia

Be sure to check your specific LEX HCFSA plan to ensure you’re using your funds for eligible expenses.

Dependent Care FSA (DCFSA)

DCFSAs are most useful for parents and guardians who have dependent care expenses, either for a qualifying child or dependent adult. According to research, American families spend an average of 17.8% of their income on childcare. These costs tend to be approximately $293 per week.¹⁶ If you have access to a DCFSA, it may help offset some of these costs. The 2025 contribution limit for DCFSAs is $2,500 for married couples filing separately and $5,000 for single filers and couples filing jointly.¹⁷Some common uses for DCFSA funds include:¹⁸

Care for a dependent under age 13
- Before and after school care
- Babysitting and nanny expenses
- Daycare, nursery school, and preschool
- Summer day camp
Care for your spouse or relative who is physically or mentally incapable of self-care and lives in your home

Be sure to check your specific DCFSA plan to ensure you’re using your funds for eligible expenses.

Withdrawing from an FSA

There are two common ways to withdraw money from your FSA; your method will depend on your company and how your program is administered. Some FSAs send you a debit card and/or physical check to use at the time of service. Other FSAs require you to pay for the expense up front and submit a claim for reimbursement from your FSA. Once the claim has been processed, the funds are distributed from your FSA back to you.¹⁹Check with your benefits manager to learn more about how you’re able to withdraw from your FSA.

Should I Have an FSA?

Deciding whether to take advantage of an FSA often comes down to how likely you are to use the funds in the account. To get the most out of an FSA, take time to add up your average healthcare spending in the categories mentioned above. Use this estimate to determine how much money you should put into these accounts to ensure you don’t lose funds at the end of the year. For example, if you wear contacts or glasses, putting funds into a HCFSA or a LEX HCFSA may allow you to use tax-free money to pay for your eye exam and a new set of glasses or contacts. Or perhaps you work full-time and have a toddler. Putting funds into a DCFSA could allow you to use tax-free money to cover some of your child’s daycare expenses. Placing money into these accounts for expenses that you’d likely incur anyway may allow you to reduce your tax burden. These savings accounts may also help you plan for spending and better manage your money since you’re not able to change your contribution amounts once open enrollment ends (except if you experience a qualifying life event). Additionally, if your employer offers FSA contributions as part of your total compensation, you have a big incentive to open an FSA account and take advantage of this benefit.²⁰Again, if you aren’t sure if an FSA is right for you, chat with a financial or tax advisor about your situation.

Final Thoughts

FSAs offer the potential to pay for certain medical and dependent expenses with pre-tax money providing you follow the guidelines set up by the IRS. If your employer offers FSA benefit options, you may want to evaluate how much you usually spend on these costs each year and consider if an FSA account is a smart money move for you.For advice specific to your situation, consult a financial professional.

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