It can be hard to predict medical expenses throughout the year, which is why it can be helpful to have separate savings account designated for health care costs. A Flexible Spending Account (FSA) is designed to help you access pre-tax dollars for healthcare costs while offering additional benefits like employer contributions.
If you’ve ever wondered “What is an FSA?” or if you want to understand if this health savings plan is worthwhile for you, read on to find out more.
What is a Flexible Spending Account (FSA)?
A Flexible Spending Account, also known as an FSA is a healthcare savings plan offered through employers to help employees better afford healthcare costs throughout the year. Both employees and employers can contribute to FSAs, though not all employers will offer company contributions.
In order to use your funds, you’ll typically receive a debit card that links to your FSA account.
Types of FSAs
There are three types of FSAs that your employer might offer:
Health care FSAs
This is the main type of FSA, which allows you to contribute pre-tax dollars to help pay for medical expenses throughout the year.
Limited Expense Health Care FSAs
This secondary type of FSA can be used to pay for vision or dental-related expenses. In order to open a limited expense health care FSA, you’ll first need a regular health care FSA.
Dependent Care FSAs
This type of FSA helps you cover child care costs for any dependent in your household under 13 years of age.
2024 FSA limits and federal requirements
There is a federal limit to how much money you’re allowed to contribute to an FSA each year. For 2024, that limit is $3,200, according to the IRS. Employers also have limits to how much they’re allowed to contribute. While an employer can contribute up to $500 to an employee’s FSA, according to Core Documents Inc, even if the employee themself isn’t contributing, after this amount, the employer is only legally allowed to match an employee’s contribution dollar-for-dollar.
You are also required to use the money in your FSA within the plan year. This means you’ll lose any untouched balance in your FSA account, so it’s important to plan ahead and only contribute what you expect to use.
However, some employers offer options if your money isn’t fully used before the year ends:
- You can carryover a balance not exceeding $640 per year to use in the following year
- You have up to 2.5 months to use last year’s balance before it expires
Employers are not required to offer these options, but many companies do.
FSA eligible expenses: What can you use your FSA account to pay for?
When it comes to FSA eligible expenses, there are also limits to what is covered under an FSA. For health care FSAs, you’re allowed to spend your distributions on:
- Dental expenses (depending on your plan)
- Vision expenses (depending on your plan
- Over-the-counter medications (if prescribed by a doctor)
- Psychological services
- Acupuncture and chiropractic expenses
- Programs to quit smoking
- Birth control
- Insulin tests
- Pregnancy tests
- Breast pumps
- Bandages and other qualifying medical supplies
Dental and vision FSAs have their own qualifying dental and vision expenses, but typically cover copays, the costs of glasses or contacts, and out-of-pocket dental costs.
Child care FSAs can only be used to cover qualifying child care expenses for dependents under 13 years of age.
If you use FSA funds for non-qualifying expenses, you’ll not only be taxed on the money spent, but you’ll also often be penalized by the IRS. If you accidentally use your FSA account for a non qualifying expense, you’re typically given a grace period to replace the funds without penalty.
Who’s eligible for an FSA?
FSAs are only offered through employers, so in order to be eligible you’ll need to work at a company offering an FSA. You also must enroll during your company’s open enrollment period. Talk to your HR department for more details about your specific FSA plan.
Pros of an FSA
There are many benefits to opening an FSA, though this health savings account may not be right for everyone. Here are the main perks you’ll enjoy:
Medical savings fund
An FSA is a great way to set aside pre-tax dollars for medical expenses you’d be responsible for paying anyway. It can help you better afford high upfront costs.
Increased take-home pay
Since your FSA contributions are pre-tax, you’ll actually enjoy increased take-home pay (once you exclude what you would spend on your medical costs).
The money that goes into your FSA is pre-tax and you’re not required to pay tax on it when you use it for qualifying health care expenses.
Having an account designated for health care expenses can make paying for copays and prescriptions even easier.
Once you begin contributing to your FSA, your funds are available for distribution right away.
Cons of an FSA
Of course, there are some drawbacks to this type of health savings plan. A few of the main disadvantages include:
Yearly contribution limitations
If you tend to have high medical costs each year, you’ll need to be aware of the FSA contribution limits ($3,200 per year, according to the IRS) and rollover limits ($640 per year, if your employer offers this option). If your expenses are typically higher, it may make sense to research an additional or separate health care savings plan, like an HSA (Health Savings Account).
Use it or lose it functionality
FSAs come with an expiration date and typically if you don’t use all of your funds before your plan year ends, you’ll lose them. Some plans do offer small rollover amounts or a temporary extension to use your funding, but you could still be throwing dollars away on FSAs.
Tied to employment
Since your FSA is only available through your employer, if you lose your job or move on to a new venture, you’ll also lose your FSA funds. You can’t take them with you or withdraw them to use later.
Limited window of enrollment
In order to sign up for an FSA, you’ll need to register during your employer’s open enrollment period. You typically cannot sign up outside of this period (though some exceptions may apply).
How to set up an FSA
You can set up a Flexible Spending Account through your company’s HR department. If you’re a new hire, you typically have a set period of time to enroll in an FSA. If you’re a current employee, you’ll likely be required to sign up during your company’s open enrollment period.
Is a Flexible Spending Account worth it?
In some cases, an FSA can help you put pre-tax dollars towards medical expenses you’d be required to pay anyway, while boosting your take-home pay. It’s important not to put too much money into an FSA, since you run the risk of losing it at the end of your plan year.
If you typically have steady medical expenses or if a member of your immediate family does, a Flexible Spending Account can be a great way to save for health care expenses, while also receiving employer contributions.
But, if you’re young and healthy or if you’re currently job searching, it might make more sense to open an HSA (health savings account), high-yield savings account, or investment account instead.