What is an FSA?

An FSA (Flexible Spending Account) is an employer-sponsored, tax-advantaged account that lets you set aside pre-tax dollars for qualified medical or dependent-care expenses. Contributions reduce your taxable income, but most FSA funds must be used within the plan year — they don't roll over like HSA funds.

A Flexible Spending Account (FSA) is a benefit offered through your employer that lets you redirect a portion of your paycheck into an account before income and payroll taxes are calculated. The IRS governs FSAs under Section 125 of the Internal Revenue Code. Unlike an HSA, an FSA is not paired to a specific health plan — you can have one regardless of whether you're enrolled in an HDHP. The tradeoff: FSA funds generally expire at the end of the plan year, though employers may offer a grace period or limited rollover.

Types of FSAs

Health Care FSA: covers qualified medical, dental, and vision expenses for you and your dependents. The 2024 contribution limit is $3,200.
Dependent Care FSA (DCFSA): covers childcare, preschool, and elder care costs that enable you (and your spouse) to work. The 2024 limit is $5,000 per household ($2,500 if married filing separately).
Limited-Purpose FSA: available to HSA holders — covers dental and vision only, preserving HSA eligibility.

The "use it or lose it" rule

Federal rules require FSA funds to be used for expenses incurred within the plan year. Employers have two options to soften this: (1) a 2.5-month grace period to spend remaining funds, or (2) a rollover of up to $640 (2024) into the following year. Your employer can offer one or neither — not both. Check your plan documents before year-end. IRS Publication 969 has the full rules.

How FSAs reduce your tax bill

Because contributions come out pre-tax, every dollar you put into an FSA avoids federal income tax and payroll taxes (Social Security + Medicare). For someone in the 22% federal bracket who also pays 7.65% in payroll taxes, each $1,000 in FSA contributions saves roughly $296.50 in combined taxes. The CFPB has a plain-language guide to help consumers understand tax-advantaged health accounts before open enrollment.

FSA vs. HSA: key differences

FSA: available to most employees regardless of health plan; funds generally expire annually; employer-owned account.
HSA: requires HDHP enrollment; funds roll over indefinitely; you own the account even if you change jobs.
You generally cannot contribute to both a Health Care FSA and an HSA in the same year (Limited-Purpose FSA is the exception).

IRS FSA rules for 2024

The 2024 Health Care FSA contribution limit is $3,200 per employee; the Dependent Care FSA limit is $5,000 per household. — IRS Publication 969
Employers may allow either a 2.5-month grace period or a rollover of up to $640 (2024) to the next plan year — but not both options simultaneously. — IRS Publication 969
FSA contributions are excluded from federal income tax and Social Security and Medicare (FICA) taxes. — IRS Publication 969

Key takeaways

An FSA reduces your taxable income by letting you pay for medical and dependent-care costs with pre-tax dollars.
Health Care FSA limit is $3,200 in 2024; Dependent Care FSA limit is $5,000 per household.
Most FSA funds expire at year-end — plan contributions carefully so you don't forfeit the balance.
Unlike an HSA, an FSA doesn't require a high-deductible health plan, and you can't take it with you if you change jobs.
A Limited-Purpose FSA lets HSA holders cover dental and vision costs while keeping HSA eligibility intact.