What Is a Flexible Spending Account?

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A flexible spending account (FSA) is an employer-sponsored savings account that lets employees pay certain out-of-pocket medical or dependent care costs with tax-free dollars.

Key Takeaways

  • Flexible spending accounts (FSAs) are employer-sponsored savings plans that let employees pay for certain out-of-pocket medical costs or dependent care expenses using tax-free dollars.
  • You contribute to these accounts by withholding of a portion from each paycheck throughout the year.
  • Health care FSA funds are accessible from the beginning of the plan year even if you haven't contributed anything yet, but you must wait until you’ve made contributions to your dependent care accounts before you can use them.
  • FSAs are best for people who can forecast yearly qualifying costs accurately, because if you don't use all your savings by year-end, you lose it.

How Flexible Spending Accounts Work

Employees and employers (on behalf of the employee) can contribute to a flexible spending account with pre-tax income when an employer offers an FSA. Employees can then spend the funds directly on eligible expenses during the covered period, or they can pay out of pocket and request reimbursement.


Flexible spending accounts are also called flex accounts, flexible-spending arrangements, or FSAs.

Flexible spending accounts are usually for medical, dental, or dependent care expenses. The primary types of FSAs are health care FSA (HCFSA, health FSA, or medical FSA), special purpose FSAs (for dental and vision), and dependent care FSA (DCFSA). Less common types of FSAs include adoption assistance FSAs. 

Employers aren’t legally required to offer FSAs, but if yours does, you can choose whether to participate in the plan during the annual benefits enrollment period. You’ll then set aside pre-tax dollars from your paycheck to put toward an FSA to fund future qualified expenses.

Let's say your gross income for the year was $70,000 and you made $4,000 in FSA contributions over the year. Only $66,000 of your income would be subject to income tax. Your contributions would go into your FSA before Federal Insurance Contribution Act (FICA) (Social Security and Medicare) tax is withheld, as well as before Federal Unemployment Tax Act (FUTA) tax, or income taxes are taken out.


Health FSAs have a contribution limit of $2,850 in 2022, and $3,050 in 2023. Dependent care FSAs can have limits up to $5,000.

You can spend health care FSA funds at any point during the year, regardless of how much you’ve actually contributed. But only money that's already in a dependent care FSA can go toward qualifying expenses.

You can participate in both types of accounts if your employer offers both, but you must make separate elections for and contributions to each. 

If you’re also contributing to a health savings account (HSA), your only FSA option may be a limited purpose flexible spending account (LPFSA), which only covers vision and dental expenses.

How To Use FSA Funds

When you enroll in an FSA, you may receive a debit card so that you can use the funds in your accounts to pay qualified expenses directly. Or, you can pay out of pocket and seek reimbursement after. 

You may be tempted to go for the maximum contribution limits to take advantage of the tax benefits, but it’s typically a “use it or lose it” system. The funds in the account may expire if you don’t use the money by the end of the year.

Employers can elect to offer a grace period of two and a half months, although they don’t have to. This extends the time you have to use the funds. Health care FSAs have the additional option of allowing you to carry over a maximum of $610 from 2022 to 2023 instead of a grace period. This is also your employer’s decision.

Flexible Spending Accounts: Example

To see how you would contribute to and use funds from multiple kinds of FSAs let's look at an example. Say your employer offers a health care FSA and a dependent care FSA, and allows employees to contribute an annual maximum of $2,750 to the health care FSA and $5,000 to the dependent care FSA. You may decide to put $2,000 into each FSA, and spread your contributions out equally over the course of a year.


Many FSA plans align with the calendar year, but they don’t have to. They can cover any 12-month period, so make sure you understand when your FSA’s plan year begins and ends.

You have $1,000 saved in each FSA account and you’re halfway into your funding goal six months into the year. You’ve also just received bills of $1,500 for qualifying medical expenses and $2,000 for dependent care expenses. 

You could immediately request reimbursement for all $1,500 of medical expenses, despite only having $1,000 in the account so far because you can spend HCFSA funds at any point during the year regardless of how much you’ve contributed.

But you can only use the money you actually have in a DCFSA toward dependent care expenses. You would have to wait until you accrue more contributions to get reimbursement for the full $2,000 in dependent care bills because you're $500 short at this point.

Don't forget to request reimbursement by the end of the plan year because your funds expire unless your employer offers a carryover or grace period. 


Submit a claim to your FSA to request a refund. Include proof of the qualified expense and a statement explaining that another plan didn’t cover it.

What Do Health Care FSAs Cover?

The IRS defines qualified medical expenses as the costs of diagnosis, cure, mitigation, and treatment or prevention of disease for any part or function of the body. These include:

  • Payments for services by professional medical practitioners
  • Costs of equipment, supplies, and diagnostic devices for these purposes
  • Transportation costs to receive medical care
  • Over-the-counter medicine and menstrual care products

Insurance premiums and long-term care costs are not reimbursable with a health care FSA, nor are any amounts covered under another health plan.

Qualified health expenses are applicable to you and your spouse, your adult dependents, or your child under age 27. But dependents who are married and filing joint returns or those who have gross annual incomes above $4,300 are excluded.


The IRS has issued a statement notifying taxpayers that at-home COVID-19 tests and personal protective equipment, such as face masks and hand sanitizers, are considered eligible medical expenses that can be paid for or reimbursed by health flexible spending arrangements (health FSAs), health savings accounts (HSAs), and health reimbursement arrangements (HRAs).

What Do Dependent Care FSAs Cover?

Qualified expenses for dependent care FSAs generally include services that let you or your spouse work, look for work, or attend school full time. Some common examples include before- and after-school child care, in-home dependent care, and daycare in a facility.

These expenses must be for a dependent child who is under the age of 13 and who you can claim a tax deduction for, or for a spouse or dependent who can’t take care of themselves.


You can’t use dependent care FSA funds to pay for services that a child’s parent provides. For example, you couldn't use the money contributed to an FSA account to pay your ex-spouse to watch your child.

Do I Need a Flexible Spending Account?

Flexible spending accounts tend to benefit people who can reliably predict their medical or dependent care expenses throughout the year. Consider using an FSA if you’ve been using childcare for 12 months and feel confident that you’ll spend the same amount in the next 12 months. 

If your employer offers one or more types of FSAs, it can be worth investigating their terms to determine whether contributing might benefit you. Consider the elections that your employer makes for your FSA, such as the contribution limit (your employer can choose a lower limit than the IRS allows) or whether it offers a grace period for using the funds.

Always remember that FSA funds expire. You’ll receive the most benefit if you can spend what you contribute within the allotted time frame, but you'll lose money otherwise. Using all your funds lowers your tax burden without reducing your effective income.

You must deduct any amount you elect to contribute to a dependent care FSA from the Child and Dependent Care federal tax credit. Consult with a tax professional to determine which option works best for you.

Frequently Asked Questions (FAQs)

How does a Flexible Spending Account work?

If your employer offers a health plan, you can contribute to and use a Flexible Spending Account (FSA). Money you put into this account is tax-free, and you can take it out and use it to cover health care costs including copayments and deductibles. Your employer might choose to contribute to your FSA, but they aren't required to.

What can I buy with my FSA card?

If you have an FSA debit card, you can use it to pay directly for FSA eligible items. You can find a list of items that are typically FSA eligible here. If you are unsure about an item, you'll need to speak to your FSA administrator. They may be able to provide you with a list. The money will be taken directly out of your FSA account.

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