Flexible Spending Accounts (FSAs) are employer-provided, tax-free accounts designed to help employees save money for medical and dependent care expenses. By setting aside pre-tax dollars, employees can manage qualified expenses more effectively.
Types of FSAs
Health care flexible spending accounts (HCFSAs)
- HCFSAs allow employees to allocate tax-free funds for medical, dental, vision and prescription expenses not covered by their health plan
- These FSAs can be standard or limited purpose, suitable for pairing with a Health Savings Account (HSA)
Limited purpose flexible spending accounts (LPFSAs)
- LPFSAs are specifically for individuals enrolled in a High Deductible Health Plan (HDHP) who are also contributing to a Health Savings Account (HSA)
- These accounts are restricted to dental and vison care expenses, allowing participants to preserve their HSA funds for future medical needs
Dependent care flexible spending accounts (DCFSAs)
- DCFSAs provide tax-preferred options for managing child care and care for dependent adults
Key Features of FSAs
Eligibility qualifications
- Available to employees of organizations that offer FSAs
- Enrollment occurs during employer’s open enrollment period or due to a qualifying life event
Contribution limits (2025)
- HCFSA: Employees can contribute up to $3,300 per person
- DCFSA: Employees can contribute up to $5,000 per year per household ($2,500 married filing separately)
Tax advantages
- Contributions are deducted from employees’ paycheck before taxes
- Withdrawals for qualified expenses are tax-free
Qualified expenses
- HCFSAs cover medical, dental and vision expenses. Some non-medical expenses may qualify if prescribed by healthcare providers
- LPFSAs generally cover dental and vision expenses
- DCFSAs cover costs for child care and care for adult dependents unable to care for themselves
Year end considerations
- In general, employees must incur expenses for the full account balance by the end of the plan year otherwise they forfeit any remaining balance in the account. Employees generally have a run-out period to submit reimbursement claims for the prior year before any remaining balances are forfeited.
- Employers may also adopt either a grace period or carry over provision (but not both):
- Grace period – Employees may incur eligible expenses for up to two and a half months after the end of the plan year and be reimbursed from the any remaining balance from the prior year
- Carry over - Employees can carry over a portion of their unused Health Care FSA balance to the next plan year. Per the IRS, FSA plan participants can carry over up to $640 from 2024 to 2025
FSAs offer a valuable opportunity for employees to manage out-of-pocket medical and dependent care expenses efficiently. By leveraging the tax advantages and various types of FSAs available, employees can tailor their contributions to meet their specific needs, whether it’s for healthcare, dental, vision, or dependent care.
