Flexible Spending Account (FSA)
Summary Definition: An employer-sponsored savings account that allows employees to set aside a portion of their pre-tax earnings to cover qualified, out-of-pocket healthcare expenses.
What is an FSA?
A flexible spending account (FSA), sometimes called a flexible spending arrangement, is an employer-sponsored savings account that allows employees to set aside portions of their gross pay for eligible expenses, such as prescription drugs, medical equipment, or certain dependent care costs. Employers may also contribute to the account, but it isn’t required.
Contributions are exempt from FICA taxes, as well as federal and state income taxes, effectively reducing employees' taxable income. At the end of the plan year, however, any unused funds in the account may be forfeited to the employers.
Key Takeaways
- Flexible spending accounts allow employees to set aside pre-tax income for future medical, dental, or vision expenses.
- FSAs serve the same purpose as HSAs but have several differences, such as the forfeiture of unspent funds at the end of the year.
- The three main kinds of accounts are Health Care FSA, Dependent Care FSA, and Limited Purpose FSA.
- FSA-eligible items include prescription medication, hearing aids, psychiatric care, and surgery fees.
FSA vs. HSA
A health savings account (HSA) is a similar financial tool employers can provide, but it has more limitations. Both accounts, for example, can help cover out-of-pocket expenses, but qualifying for an HSA requires the employee to also enroll in a high deductible health plan (HDHP). FSAs have no such requirement.
Additionally, employees can access the funds in a flexible spending account immediately, while health savings accounts require employees to deposit the funds first. At the end of the year, though, there’s typically a “use-it-or-lose-it” deadline with an FSA, meaning any unused funds are forfeited back to the employer.
Sometimes, an employer can allow a portion of the account to roll over or give employees extra time (a.k.a. grace period) to use the remaining funds, but this isn’t always the case. HSA funds, conversely, never expire, fully roll over, and can be invested in other financial tools (e.g., stocks or bonds) to further maximize account growth.
Put simply, a flexible spending account has fewer setup requirements and earlier fund access than a health savings account but less flexibility and fewer long-term savings advantages.
FSA vs. HRA
Instead of a savings account that stores contributions and builds value over time, some employers offer a health reimbursement arrangement (HRA), which provides employees with tax-free repayments for qualifying expenses.
Like an FSA, HRAs are owned by the employer but are even more flexible and customizable. For example, some HRAs can cover monthly health insurance premiums, while FSAs and HSAs can’t.
| FSA | HSA | HRA | |
| Account Owner | Employer | Employee | Employer |
| Employee Eligibility | All Employees | HDHP required | All employees |
| Annual Rollover | No* | Yes | Possibly |
| Account Portability | Stays with employer | Follows employee | Stays with employer |
| Non-Qualified Withdrawals Allowed | No | Yes** | N/A |
| Investable Funds | No | Yes | No |
| Funds Earn Interest | No | Yes | No |
*Employers can allow limited rollovers or a “grace period” to spend remaining funds, but this isn’t required.
**Such withdrawals are subject to income taxes and penalties.
How Does an FSA Work?
Like an HSA, employees with a flexible spending account can decide how much to contribute from each paycheck, but any funds remaining in the flex spending account at the end of the year are forfeited to the employer.
Some employers, however, allow employees to roll over a portion of the funds or receive a “grace period” of two and a half extra months to spend the remaining balance.
Employees may receive an FSA debit card to access FSA funds for everyday use. Some expenses, though, require employees to provide proof of medical necessity to qualify the purchases as FSA-eligible expenses.
Regardless, some employers simplify the process by using Human Resource Information System (HRIS) software to give employees a self-service portal for managing FSA card transactions and tracking account balances.
Flexible Spending Account Types
While often used for medical expenses, flexible spending accounts aren’t limited to health care. There are, in fact, three main FSA types, each with a specific purpose, 2025 contribution limits, and eligible expenses.
| Type | Purpose | 2025 FSA Limits | FSA-Approved Items* |
| Health Care Flexible Spending Account | Cover eligible medical and dental expenses |
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| Dependent Care Flexible Spending Account | Cover the costs of caring for a dependent (e.g., child under 13 or spouse incapable of self-care) |
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| Limited Purpose Flexible Spending Account | Compatible with HSAs to further cover dental and vision expenses |
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*Employees should consult their employer’s plan requirements for more details regarding flexible spending approved items.
**Can be made dollar-for-dollar alongside the employee’s contributions or as a lump sum at the beginning of the year.
Flexible Spending Account Tax Benefits
LFSAs provide multiple tax benefits for employees who use them, generally because their funds aren’t subject to payroll or income taxes at any stage of their lifecycle (i.e., initial deposit, accumulation over time, and eventual use). In other words, by maximizing FSA savings, employees:
- Reduce how much they pay in income taxes on each paycheck.
- Avoid paying income taxes on the account’s balance as it accumulates funds.
- Avoid paying taxes on any amount when it’s withdrawn for flex spending eligible expenses.
FSA Tax Forms
Unlike with HSAs, most FSA users don’t have to submit a special tax form for their FSA deposits when filing annual income tax returns.
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