What is a Flexible Spending Account (FSA) and how does it work?

A Flexible Spending Account (FSA) is an employer-sponsored benefit that lets you set aside pre-tax dollars to pay for qualified medical, dental, and vision expenses. Contributions reduce your taxable income. Most FSAs have a 'use it or lose it' rule — unused funds expire at year-end unless your plan has a grace period or rollover option.

A Flexible Spending Account (FSA) is a tax-advantaged account offered by employers that lets employees set aside pre-tax dollars for qualified out-of-pocket health care expenses. FSA contributions lower your taxable income dollar-for-dollar. For 2024, the IRS limits employee FSA contributions to $3,200 per year. IRS Publication 969 covers FSA rules in detail.

What FSA funds can cover

Deductibles and copays for medical, dental, and vision services.
Prescription drugs and certain over-the-counter medications.
Medical equipment (bandages, blood pressure monitors, crutches).
Glasses, contact lenses, and contact lens solution.
Dental care (fillings, cleanings, orthodontia in some cases).
The IRS publishes a full eligible expense list at irs.gov/publications/p969.

Use it or lose it

FSAs are subject to the IRS 'use it or lose it' rule — funds not spent by the plan year deadline are forfeited. Employers can offer a grace period (up to 2.5 months into the new plan year) or allow a limited rollover ($640 for 2024) — but not both, and neither is required. Check your plan's Summary Plan Description (SPD) for your specific rules.

FSA vs. HSA

Key differences: FSAs are offered by employers (you cannot open one independently); HSAs require a qualifying high-deductible health plan (HDHP) and are yours to keep if you change jobs. HSA funds roll over indefinitely — no expiration. Both offer tax advantages, but HSAs are more flexible for long-term savings. You cannot contribute to both a standard FSA and an HSA in the same year (a Limited Purpose FSA for dental/vision is the exception).

IRS sources

For 2024, the health FSA salary reduction contribution limit is $3,200. An employer may allow a rollover of up to $640 from 2024 into 2025, or offer a grace period, but not both. — IRS

Key takeaways

FSA contributions are pre-tax — reduces your taxable income dollar-for-dollar.
2024 contribution limit: $3,200 per employee.
Use it or lose it: unspent funds expire (check if your plan has a grace period or rollover).
FSA vs. HSA: FSA is employer-offered; HSA requires an HDHP and rolls over indefinitely.
The full FSA balance is available on day one of the plan year, not just what you've contributed so far.

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