What Is a Flexible Spending Account (FSA)? How to Use It to Save on Taxes

A Flexible Spending Account (FSA) is a benefit offered through your employer that lets you set aside pre-tax money to pay for qualifying medical, dental, vision, or dependent care expenses. Because the money comes out before income taxes, you effectively get a discount equal to your tax rate on every eligible expense.

How an FSA Works

You choose a contribution amount during your employer's open enrollment period. That amount is divided across your paychecks and deposited into your FSA. When you have a qualifying expense, you pay with an FSA debit card or submit a reimbursement claim. The IRS limits how much you can contribute each year.

2025 FSA contribution limits:

• Health FSA: $3,300 per year (individual limit; some employers allow spousal contribution too)
• Dependent Care FSA: $5,000 per household ($2,500 if married filing separately)

What You Can Pay For With a Health FSA

• Doctor and dentist co-pays, deductibles, and coinsurance
• Prescription medications
• Vision care: glasses, contacts, eye exams
• Over-the-counter medications and menstrual products (since 2020)
• Medical equipment like crutches, blood pressure monitors
• Fertility treatments and certain mental health services

The Use-It-Or-Lose-It Rule

This is the main downside of FSAs: money not spent by the plan year end is typically forfeited. Employers may offer a grace period (up to 2.5 months) or allow a rollover of up to $660 (2025 limit), but not both. Know your employer's policy before contributing.

FSA vs. HSA: Key Differences

Health Savings Accounts (HSAs) are often confused with FSAs. Key differences:

• HSA requires a high-deductible health plan (HDHP); FSA works with most plans
• HSA money rolls over indefinitely; FSA is generally use-it-or-lose-it
• HSA can be invested and grow tax-free; FSA cannot
• HSA is yours even if you change jobs; FSA often isn't
• Contribution limits differ: HSA allows more ($4,300 individual / $8,550 family in 2025)

Dependent Care FSA

A separate Dependent Care FSA covers childcare, after-school programs, and summer day camps for children under 13 — or care for a spouse or dependent who is physically or mentally incapable of self-care. This is separate from the health FSA and has its own $5,000 household limit.

How Much Can an FSA Save You?

Example: You contribute $2,000 to a health FSA and you're in the 22% federal bracket, plus 7.65% payroll tax. Your effective savings rate is about 30%. That means $2,000 in medical costs effectively costs you $1,400 — a $600 savings just for enrolling and spending on things you were going to pay anyway.