What Is a Flexible Spending Account?

Flex Accounts Explained


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

A doctor and a nurse review information on a tablet device.

The Good Brigade / Getty Images

Definition and Example of a Flexible Spending Account

A flexible spending account is an account you get through your employer that lets you pay certain medical or dependent care expenses with tax-free dollars. 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 qualified expenses during the covered period, or they can pay out of pocket and request reimbursement.

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

Flexible spending accounts are usually for medical 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. 

  • Alternate names: Flex account, flexible-spending arrangement, FSA

The most recent USDA data show that the average middle income family would have spent roughly $12,980 per child in 2015 for general child care. Furthermore, according to a 2019 study of U.S. census data, typical yearly health insurance premiums were about $2,200 and out-of-pocket costs were around $3,700. On the higher end, some households spent more than $8,000 on premiums and about $12,080 on out-of-pocket costs a year. Medical expenses will likely remain a significant portion of the average American’s budget for some time, so it can be worth investigating cost-saving strategies like FSAs.

How Flexible Spending Accounts Work

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

Health FSAs have a contribution limit of $2,850 in 2022, an increase from $2,750 per person in 2021. Dependent care FSAs can have limits up to $5,000 in 2022. Your employer can impose lower limits. 

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

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

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

How to Use FSA Funds

You can use the funds in your accounts to pay qualified expenses directly in some cases, but more often you’ll 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 a carryover of $570 in 2022 instead of a grace period. This is also your employer’s decision.


Due to the pandemic, employers are able to elect to offer either unlimited carryovers for amounts exceeding $550 in 2021 ($570 in 2022) or 12-month grace periods for plans with years ending in 2020, 2021, and 2022.

Flexible Spending Accounts: Example Case

Let's say that 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 decide to put $2,000 into each FSA. Your contributions are spread out equally over the year, which is typical.


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 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.

Your funds expire unless your employer offers a carryover or grace period if you forget to request reimbursement by the end of the plan year. 


Submit a claim to your FSA through your employer 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 after December 31, 2019

Qualified medical expenses also typically include insurance premiums and long-term care costs for tax purposes, but these aren’t 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. You couldn't make $5,000 in contributions and use them to pay your ex-spouse $875 a month to watch your child.

Do I Need a Flexible Spending Account?

It can be worth investigating their terms to determine whether contributing might benefit you if your employer offers one or more types of flexible spending accounts. Consider the elections that your employer makes for your FSA, such as their contribution limit (which can be lower than the IRS limits) 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.

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. 

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.

Key Takeaways

  • Flexible spending accounts (FSAs) are employer-sponsored agreements that let employees pay for either qualified medical or dependent care expenses using tax-free dollars.
  • You contribute to flex accounts through withholding of a portion from each paycheck throughout the year.
  • Health care FSA funds are accessible from the beginning of the plan year, but you must wait until you’ve made contributions to your dependent care accounts before you can use them.
  • It’s best for people who can forecast yearly qualifying costs accurately, because you can only use flex account funds during a limited window.
Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Centers for Medicare & Medicaid Services. "Using a Flexible Spending Account."

  2. Internal Revenue Service. "FAQs for Government Regarding Cafeteria Plans."

  3. U.S. Department of Agriculture. "The Cost of Raising a Child."

  4. The Commonwealth Fund. "How Much U.S. Households with Employer Insurance Spend on Premiums and Out-of-Pocket Costs: A State-by-State Look."

  5. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2021."

  6. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”

  7. Internal Revenue Service. "Notice 2021-26," Pages 2-3.

  8. DC Department of Human Resources. "FSA Enrollment Brochure." Page 3.

  9. Internal Revenue Service. "Notice 2021-15," Pages 6-9.

  10. Internal Revenue Service. "IRS Outlines Changes to Health Care Spending Available Under CARES Act."

  11. Internal Revenue Service. "Publication 502, Medical and Dental Expenses."

  12. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans."

  13. Internal Revenue Service. “IRS: Cost of Home Testing for COVID-19 Is Eligible Medical Expense; Reimbursable Under FSAs, HSAs.”

  14. Internal Revenue Service. "Publication 503, Child and Dependent Care Expenses."

Related Articles