Are Flexible Spending Accounts Worth It for Your Finances?

Flexible spending accounts (FSAs) can be a great way to save money on taxes, but are they worth it for your finances? A typical FSA allows you to set aside up to $2,750 per year for medical expenses.

Using an FSA can save you around 30% in taxes, which is a significant amount. For example, if you contribute $2,750 to an FSA, you'll only pay taxes on $1,937.50, saving you $812.50 in taxes.

FSAs are only available through your employer, and you'll need to enroll during open enrollment or when you're first hired.

A Flexible Spending Account, or FSA, is a special account that lets you use pretax money to cover certain expenses. You can contribute to it with your salary before income taxes, which reduces your taxable income and saves you money on taxes.

You can use your FSA for medical expenses, over-the-counter items, dental care, and vision care. You can also use it for services like preschool, summer day camp, and day care for a child or dependent adult.

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The amount you contribute to the account is deducted from your salary, and you'll have to submit receipts and documentation for reimbursement. Alternatively, you might have a debit card to pay for expenses as you go, which is common for health care FSAs.

You can use your FSA for your own expenses or expenses incurred by your spouse or dependents you claim on your taxes. You can also use health care FSA funds for any adult children on your health insurance plan that will be 26 or younger on December 31.

A limited-purpose FSA can cover certain dental and vision care expenses, and can be used in conjunction with a health savings account, or HSA.

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Having an FSA can be a great way to save on taxes, but it's essential to understand the benefits and limitations.

Contributions to an FSA aren't subject to tax, so you can deduct the funds from your paycheck without worrying about employment or federal income tax.

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Your employer can even make contributions to your FSA, although they're not required to do so.

You can use your FSA funds to pay for day-to-day items, such as sunscreen, band-aids, and menstrual care products.

Funds are easy to access with a debit card or online portal, making it simple to manage your account.

However, FSAs come with some limitations, like the "use-it-or-lose-it" restriction.

Unused funds in an FSA typically need to be used by the end of the plan year, or they're forfeited.

Some employers may offer a 2.5 month grace period or allow you to roll over unused funds up to a certain amount, but not all employers will offer these options.

As of 2025, you may be able to roll over a maximum of $660 of unused funds, depending on your plan.

FSAs are tied to your employee benefits, so if you leave your job or are terminated, you typically won't be able to take the money in your FSA with you.

If you're self-employed or your employer doesn't offer FSAs, you won't be able to open one.

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One of the biggest benefits of an FSA is that contributions aren't subject to tax. This means that the funds you contribute to your FSA are deducted from your paycheck before taxes are taken out.

Your employer can also contribute to your FSA, although they aren't required to do so. This can be a nice bonus, especially if your employer offers matching funds.

With an FSA, you can use your funds to pay for day-to-day items like sunscreen, band-aids, and menstrual care products. These are the kinds of expenses that can add up quickly, but they're not always covered by insurance.

Here are some of the benefits of an FSA at a glance:

FSAs have some limitations that you should be aware of. You can only use your FSA funds by the end of the year, or they're forfeited. However, some employers may offer a 2.5 month grace period to give you extra time to use the money.

Unused funds in an FSA will generally be forfeited if not used by the end of the plan year. But, some employers might let you roll over unused funds up to a certain amount, like $660 as of 2025.

FSAs are tied to your employee benefits, so if you leave your job or are terminated, you typically won't be able to take the money in your FSA with you.

Here's a quick rundown of some key limitations:

Setting up an FSA is a relatively straightforward process. You'll typically be asked to enroll when you start a new job and during each year's benefits enrollment period.

You can decide how much you want to contribute for the year, and this amount will be divided by how many times you're paid during the year, with an equal amount taken out of each paycheck. Once you decide, you're locked in for the rest of the benefit year unless you have a change in employment or family status.

You might receive a debit card to use with your FSA, which is the easiest way to use your FSA funds. This card takes the money directly from the account, and you should save your receipt in case you're asked to verify the transaction was for eligible items or services.

If you want to use your FSA funds for elective procedures, consider scheduling them at the beginning of the year. Since you haven't yet paid the money into the fund, you're essentially taking a loan from your employer. This loan can be repaid over the course of the plan year with pretax dollars, effectively giving you a better than 0% interest rate.

You can use your FSA funds for a wide range of medical expenses, including copayments, coinsurance, deductibles, prescription medications, and more. Here are some examples of approved items:

You can set up an FSA through your employer, who will deduct pre-tax money from your paychecks to help you save for qualified healthcare expenses. This can be a great way to reduce your tax bill, as you're effectively making less money for the employer to withhold taxes from.

Typically, you can access your FSA money in three ways: using a debit card connected to your account, paying providers directly through your online portal, or submitting receipts for reimbursement. Check with your employer or FSA provider to see which option(s) they offer.

You can only get an FSA if your employer provides one, and self-employed people aren't eligible. If you're interested in signing up, you'll need to do so during your company's open enrollment period, which usually runs in November or December.

Once you've selected a contribution amount for the year, you can't change it, so be sure to choose wisely. The annual contribution limit for an FSA is $3,200 in 2024, and $3,300 in 2025.

Here are some examples of approved items you can use FSA funds for:

Remember to review the IRS Publication 502 for a comprehensive list of approved items, and be sure to check with your employer or FSA provider for any additional requirements or restrictions.

Enrolling in an FSA is a relatively straightforward process. You can usually do it when you start a new job and make your other benefits selections, or after that during your employer's annual enrollment period.

To enroll, you'll typically need to provide some basic information and decide how much you want to contribute for the year. This contribution amount will be divided by how many times you're paid during the year, with an equal amount taken out of each paycheck.

You can't get an FSA unless your employer provides one, so you'll need to check with your HR team to see if this benefit is available to you. Self-employed people aren't eligible for FSAs.

If you're eligible, you can enroll in an FSA during your company's open enrollment period, which usually runs in November or December. You can also enroll if you have a qualifying life event, such as a new baby or adoption.

Here are some key dates to keep in mind:

Once you've enrolled, you'll be locked in for the rest of the benefit year unless you have a change in employment or family status. The annual contribution limit for an FSA is $3,200 in 2024 ($3,300 in 2025).

Using your FSA is easier than you think. You can use a debit card connected to your account to pay for eligible expenses, or pay providers directly through your online portal. Some FSAs also allow you to submit receipts for reimbursement.

You can pay for a variety of expenses with your FSA, including deductibles, co-pays, and medical office visits. FSA funds can also be used for dental appointments, chiropractors, eyeglasses, contacts, hearing aids, and more. Check your plan's documentation for a full list of covered expenses.

If you're paying for care for a child or dependent adult while you work, a dependent care FSA can help. These funds can be used for day care and preschool expenses, as well as for things like summer day camp and after-school programs.

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You'll need to keep your receipts for all expenses, even if you use a debit card. This is because you may be asked to substantiate your expenses, which means you'll need to provide proof of payment.

Here are some examples of expenses you can pay for with your health care FSA:

Remember, you can't use your FSA to pay for insurance premiums, CBD products, vitamins (unless they're prenatal), or cosmetic procedures. Always check your plan's documentation for a full list of covered expenses and rules.

As the year comes to a close, it's essential to know what happens to your FSA and reimbursement account balances. Unused reimbursement account funds usually expire every year, so use it or lose it!

You'll need to spend your entire account balances by the end of the year, or you'll lose the leftover funds. If you still have money left over in your accounts at year's end, a few different things could happen.

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If you have a health care FSA or limited-use FSA, you might be able to roll over a certain amount to next year's FSA, depending on your employer's rules. Check with your employer for details.

Here are some things to keep in mind:

If you leave your job, you'll need to use up your health care or limited-use FSA funds before the last day you're employed. But if you decide to continue your employer-sponsored coverage through COBRA, you'll still be able to use funds from both of these FSAs until your COBRA coverage ends.

Flexible spending accounts (FSAs) are often compared to other plans, but they have some unique features. FSAs are only accessible through an employer, which means you can't set one up if you're self-employed.

One key difference between FSAs and other plans is the use of pretax dollars. With an FSA, you can pay for health care costs with pretax dollars, reducing your taxable income for the year. This can be a big advantage for people who have high medical expenses.

To give you a better idea, here's a comparison of FSAs with Health Savings Accounts (HSAs):

As you can see, FSAs and HSAs have similar features, but they also have some key differences.

Healthcare FSAs are the most common type, but some employers offer specialized FSAs that cater to specific needs. These plans can have different covered expenses and details.

Some employers may offer FSAs for specific purposes, such as childcare or eldercare. These plans can offer unique benefits to employees.

Contribution and rollover limits for FSAs are typically updated annually. They can differ depending on the type of FSA you have.

Here's a breakdown of some common types of FSAs:

If you contribute to a health savings account (HSA), you might not be eligible for an FSA – although certain exceptions exist.

An HSA, or Health Savings Account, is a great way to save for medical expenses while reducing your taxable income.

HSAs are owned by individuals, not employers, so you can take them with you if you change jobs or retire. This means you can use the funds in your HSA even if you're no longer employed by your current company.

One of the best things about HSAs is that the funds don't have to be used in the same year they're contributed. This means you can save up for medical expenses over time and use the funds when you need them.

HSAs also offer higher contribution limits than FSAs. In 2024, the individual contribution limit is $4,150, and the family contribution limit is $8,300. These limits will increase to $4,300 for individuals and $8,550 for families in 2025.

To be eligible for an HSA, you need to have a high-deductible health plan (HDHP). In 2024, an HDHP is defined as a plan with a deductible of $1,600 or higher for self-coverage or $3,200 or higher for family coverage. These limits will increase to $1,650 for self-coverage and $3,300 for family coverage in 2025.

Here are some key benefits of HSAs:

Looking for a way to save money on medical expenses? Pre-tax savings and spending accounts can help.

HRAs and HSAs are two types of accounts that can help you save money on medical expenses. They both offer pre-tax savings, which means you don't pay income tax on the money you contribute.

One key difference between HRAs and HSAs is that HRAs are typically offered by employers, while HSAs are individual accounts. This means that if you have an HRA, your employer is likely to contribute to it, whereas with an HSA, you're responsible for contributing to it yourself.

You can use an HRA to pay for medical expenses, but you can't use it for non-medical expenses. HSAs, on the other hand, allow you to use the money for medical expenses, as well as non-medical expenses after age 65.

HRAs are usually tied to a specific job or employer, while HSAs are portable and can be taken with you if you change jobs or retire.

HRA stands for Health Reimbursement Arrangement, which is a type of employer-sponsored plan that reimburses employees for out-of-pocket medical expenses.

Unlike FSAs, HRAs are not subject to the $2,750 annual limit on medical expenses, allowing employees to save more for their medical needs.

HRAs can be funded by employers, making them a popular choice for small businesses and startups who want to offer health benefits to their employees.

One key difference between HRAs and FSAs is that HRAs are not subject to the "use it or lose it" rule, meaning employees can carry over unused funds to the next year.

HRAs can be offered in conjunction with other plans, such as group health insurance, to provide employees with more comprehensive health benefits.