Flexible Spending Arrangement Overview and Guidelines

A flexible spending arrangement (FSA) is a type of employee benefit that allows you to set aside a portion of your income for expenses related to healthcare, childcare, or other qualified costs.

FSAs are typically offered by employers as a way to provide employees with more control over their finances and to reduce their tax burden.

To be eligible for an FSA, you must be an employee, and your employer must offer the benefit.

You can use FSAs to pay for a wide range of qualified expenses, including medical expenses, prescription medications, and even some over-the-counter medications.

A flexible spending arrangement, or FSA, is a tax-advantaged account where employees can set aside a portion of each paycheck to pay for out-of-pocket medical expenses.

No payroll taxes are due on funds allocated to an FSA, and the employee can use the money, tax-free, to pay for qualified medical expenses throughout the year.

FSAs can be used in conjunction with any type of health plan.

Unlike HSAs, which can only be contributed to if the person has coverage under an HSA-qualified high-deductible health plan, FSAs have no such restrictions.

FSAs are funded through employer transfers that they deduct from their employee's monthly paychecks. The employer front loads the funds for employee FSAs, which means they contribute a set amount to the FSA at the beginning of the year.

The employer then deducts the contribution amount that the employee elects from the employee's paycheck. This amount is held in the company's bank account to use.

Here's how the process works:

FSAs are funded through employer transfers that they deduct from their employee's monthly paychecks. This process is called front loading the funds.

The employer deducts the contribution amount that the employee elects from the employee's paycheck. For example, if an employee elects to contribute $100 per month, the employer will deduct that amount from their paycheck.

Those funds are then held in the company's bank account to use for eligible expenses. This is where the funds are kept until the employee needs to use them.

FSAs can be used to pay for medical expenses, dental expenses, and vision expenses. However, there is a type of FSA called a limited-purpose FSA that can only be used for dental and vision expenses.

Here are the two main ways that FSA funds are distributed:

Note that FSA funds cannot be used to make advance distributions. This means that employees will need to pay for expenses first and then get reimbursed by their FSA.

FSA funds can be used for a variety of qualified medical expenses, including copays, prescriptions, deductibles, and medical supplies. Employees can use their FSA funds to cover expenses for themselves, their spouses, and their dependents, including children under the age of 27.

Some examples of qualified medical expenses include over-the-counter drugs, as long as the employee's doctor has given them a prescription for said drugs, and diagnostic devices like blood sugar kits. These expenses can be paid for using an FSA debit card, which provides direct access to FSA funds at the point-of-sale.

FSA funds can also be used to purchase menstrual products, male condoms, and insulin refills, which are now qualified medical expenses under the CARES Act. This means that employees can use their pre-tax FSA funds to buy these essential items.

Here are some examples of qualified medical expenses that can be covered with FSA funds:

It's worth noting that FSA funds cannot be used for insurance premiums, long-term care coverage, or any expenses covered under another health plan.

Eligible medical items are listed in the IIAS system, which is updated monthly by the Special Interest Group for IIAS Standards (SIG-IS). These items include eye glasses, contacts, and solution, as well as copays, deductibles, and office visits.

The FSA Eligibility List includes items within eligible healthcare product categories determined by the IRS. Health Savings Accounts share the same medical item eligibility list as FSAs.

Some examples of qualified expenses for a Dependent Care FSA include in-home care, institutional care, and transportation provided by caregivers. You can also use your Dependent Care FSA for application fees and deposits required for obtaining care.

However, there are some expenses that cannot be used for a Dependent Care FSA, such as babysitting provided by a sibling or child under 19, education, and overnight camps.

For a Limited Purpose FSA, qualified medical expenses include eye exams, diagnostic services, and non-cosmetic surgery for dental care and reconstruction. You can also use your Limited Purpose FSA for orthodontia, guards for teeth grinding, and X-rays.

But there are some expenses that cannot be used for a Limited Purpose FSA, such as health insurance premiums, long-term care coverage or expenses, and anything covered under another health plan.

Here are some examples of qualified expenses for a Health FSA:

Note that over-the-counter (OTC) drugs and medical items are also eligible expenses for FSAs, but you may need to provide receipts or other documentation to substantiate your expenses.

Here are some examples of OTC items that are eligible expenses for FSAs:

The contribution and limits of a flexible spending arrangement (FSA) are pretty straightforward. The IRS sets a limit on how much you can contribute to an FSA each year.

For a Limited Purpose FSA, the contribution limit is $3,300 in 2025, and $3,200 in 2024. You can also roll over up to $660 of unused FSA funds in 2025, or $640 in 2024.

Employers can contribute to an employee's FSA, but their contributions count towards the contribution limit. If the employer contributes, they can contribute up to $500 even if the employee contributes nothing at all.

You can contribute up to $5,000 to a Dependent Care FSA in 2025 if you file taxes as an individual or are married filing jointly. If you're married but file taxes separately, you can contribute up to $2,500.

The contribution amount for a Limited Purpose FSA can only be changed within 31 days of a qualifying event, such as the birth of a child or a change in employment.

Limited Purpose FSAs are a type of FSA that can be used along with a Health Savings Account (HSA) for medical expenses, but they're more restrictive and only cover dental and vision expenses.

Contributions to limited purpose FSAs are made using pretax earnings, and they're often used in conjunction with a high-deductible health plan (HDHP) that has an HSA for medical expenses.

A standard FSA, on the other hand, can be used for qualified medical expenses, but there are some restrictions. As of 2011, FSA funds couldn't be used to purchase over-the-counter medications unless a doctor prescribed them. However, the CARES Act changed that in 2020, allowing the purchase of non-prescription over-the-counter medications with FSA funds.

The CARES Act also eliminated the previous rule prohibiting the purchase of menstrual products with FSA funds, making them eligible for reimbursement. And in 2024, the IRS issued new guidance clarifying that male condoms are a qualified medical expense and can be purchased with pre-tax FSA, HSA, or HRA funds.

Employers in California that sponsor flexible spending accounts must notify participants of any deadline to withdraw funds before the end of the plan year. This notice must be sent to all participants who work in California, and employers must provide the required notice in at least two methods, only one of which may be electronic.

FSAs offer several benefits, including lower tax burdens for employees and the potential to keep good employees in the workforce. They allow employees to pay for childcare and care for parents and other dependents with pre-tax dollars, which can be a big incentive.

One of the main benefits of FSAs is that they can be used to reimburse medical care payments, pay for spouses' and dependents' qualified medical expenses, and cover many medical equipment purchases. This can be a huge help for people with ongoing medical expenses.

You can use your FSA to cover a wide range of medical expenses, including diagnostic devices, bandages, crutches, and prescription medications. You can even use it to reimburse amounts paid for insurance plan deductibles.

However, there are some limitations to FSAs. They don't cover all manner of medical or dental expenses, and some procedures or health-related expenses aren't covered. For example, expenses for surgery for cosmetic purposes aren't reimbursable.

You also need to be aware of the "use it or lose it" provision, which means you must use the money in your FSA within the plan year. However, your employer may offer a "grace period" of up to 2 1/2 more months to use the money in your FSA.

Here are some key things to keep in mind about FSAs:

The FSA administration and management process is typically handled by the employer or the plan administrator. They are responsible for setting up and maintaining the FSA plan, including enrolling employees, distributing funds, and handling claims.

FSAs are usually set up through payroll deductions, which can be done on a pre-tax or after-tax basis. This allows employees to contribute a portion of their salary to the FSA before taxes are taken out.

The employer may also offer a debit card or a reimbursement process to help employees manage their FSA funds. This can make it easier for employees to track their expenses and stay within their FSA limits.

An FSA can be funded through regular contributions from your earnings, which are deducted from your pay before taxes, lowering your taxable income. This can result in a lower annual tax liability.

The IRS sets an annual contribution limit for FSA accounts, currently at $3,200 for medical expense FSA accounts in 2024, and $5,000 for dependent-care FSA accounts for joint and individual tax returns.

Employers can choose to contribute to an FSA, but their contribution doesn't reduce the amount you're permitted to contribute. If they do contribute, you aren't taxed on their contribution.

FSA funds can be distributed through two main methods: debit cards or reimbursements. If your employer has set up an FSA debit card, you can use it to pay for expenses at the point-of-sale.

If your employer hasn't given you direct access to your FSA funds, you'll need to pay for your expenses first and then submit the proper documentation to the FSA administrator for reimbursement.

FSA funds can be reimbursed through direct deposits to your bank account or checks mailed to your address. However, FSAs cannot make advance distributions, so you'll need to pay for your expenses first or use your FSA debit card to pay at the point-of-sale.

Here are the main ways to access your FSA funds:

As a helpful AI assistant, I can tell you that a Dependent Care FSA is a smart way to save money while taking care of your loved ones, with a contribution limit of $5,000 for married and filing jointly or single as head of household, and $2,500 for married and filing separately.

You can use a Dependent Care FSA to pay for dependent care services like preschool, summer day camp, and child or elder daycare. This type of FSA is a pre-tax benefit account, which means you won't have to pay income taxes on the contributions.

The IRS sets a limit on how much you can contribute to a Dependent Care FSA each year, and there's an added grace period allowing you to continue to use current dependent care funds to reimburse expenses incurred for 2 ½ months after the end of the benefits plan year.

To be eligible for a Dependent Care FSA, you must have at least one of the following living with you full time: a child who is under the age of 13 or a spouse or relative who is physically or mentally incapable of taking care of themselves.

Here are the eligibility rules for a Dependent Care FSA:

A Dependent Care FSA is a flexible spending account that allows you to fund it throughout the year with each deduction from your paycheck, and you can use the money once it's deposited into the account. This means you won't have to front-load the account, which is a benefit compared to Healthcare FSAs.