# What Is a Flexible Spending Account (FSA)?

![Flexible Spending Account (FSA): An employerâsponsored savings account that allows employees to set aside pretax funds for qualified medical expenses](https://www.investopedia.com/thmb/hfZ_7Ego85xQfxWaw1GObSeB-cU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Flexiblespendingaccount_final-406003b9b9084547907429f52dcefef8.png)

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## What Is a Flexible Spending Account (FSA)?

A [flexible spending account (FSA)](https://www.investopedia.com/ask/answers/111715/can-flexible-spending-account-fsa-be-used-spouse.asp) is an employer-sponsored savings account that lets employees set aside pretax funds for qualified medical expenses. It can help the account holder save money at tax time, especially because the list of allowable expenses that can be paid for with FSA funds has grown in recent years.

The account, which is also sometimes called a "flexible spending arrangement," lets you contribute a portion of your regular earnings before tax; employers also can contribute to employees’ FSAs. Distributions from the account must be used to reimburse the employee for qualified expenses related to medical and dental services.

Another type of FSA is a [dependent-care flexible spending account](https://www.investopedia.com/terms/d/dependent-care-fsa.asp), which is used to pay for child-care expenses for children age 12 and under and also can be used to pay for the care of qualifying adults, including a spouse, who can't care for themselves and meet specific Internal Revenue Service (IRS) guidelines. A dependent-care FSA has [different maximum contribution rules](https://www.investopedia.com/articles/pf/09/dependent-care-fsa.asp) than a medical-related FSA.

### Key Takeaways

*   An FSA is a type of savings account that allows employees to contribute a portion of their regular earnings pretax to pay for health-related costs.
*   Funds contributed to the account are deducted from earnings and aren't subject to income and payroll taxes.
*   Funds withdrawn from an FSA to pay qualified medical expenses aren't subject to tax.
*   The money in an FSA must be used by the end of the plan year, but employers can offer a grace period of up to 2 1/2 months, through March 15 of the following year.

## How a Flexible Spending Account (FSA) Works

One of the key benefits of a flexible spending account is that the funds contributed to the account are deducted from your earnings before taxes, lowering your [taxable income](https://www.investopedia.com/terms/t/taxableincome.asp). As a result, [regular contributions to an FSA can reduce your annual tax liability](https://www.investopedia.com/ask/answers/012715/what-are-best-ways-lower-my-taxable-income.asp).

The IRS limits how much can be contributed to an FSA each year. For medical expense FSA accounts, the annual contribution limit is $3,200 for 2024.

If you are married, your spouse also can put aside up to the annual contribution limit through their employer. Employers can choose to contribute to an [FSA](https://www.investopedia.com/7-surprising-things-your-fsa-covers-5213792), but they don't have to—if they do, their contribution doesn't reduce the amount that you are permitted to contribute. You aren't taxed on employer contributions.

> **Important**
>
> For 2024, the contribution limit for a dependent-care FSA is $5,000 for joint and individual tax returns and $2,500 for married taxpayers filing separately.

## Pros and Cons of Flexible Spending Accounts (FSAs)

Besides their tax benefits, FSAs offer several advantages for account holders, but they don't cover all manner of [medical or dental expenses](https://www.investopedia.com/ask/answers/120215/can-flexible-spending-account-fsa-be-used-dental.asp). Here are some of their pros and cons:

Pros

*   Reimburse medical care payments
    
*   Pay spouses' and dependents' qualified medical expenses
    
*   Cover many medical equipment purchases
    
*   Reimburse amounts paid for insurance plan deductibles
    

Cons

*   Some procedures or health-related expenses aren't covered
    
*   Funds have a "use it or lose it" provision
    
*   Can't be used to pay for insurance premiums
    

### Pros

*   **Reimburse medical care payments**: The [pretax funds contributed](https://www.investopedia.com/ask/answers/112315/are-flexible-spending-account-fsa-contributions-tax-deductible.asp) to an FSA can be used for this purpose, which is defined to include amounts paid for the diagnoses, cure, mitigation, treatment, or prevention of disease or ailments affecting any structure of the body.
*   **Pay spouses' and dependents' qualified medical expenses**: FSA owners can use the account to cover these, along with their own medical costs.  
    
*   **Cover many medical equipment purchases**: Diagnostic devices, bandages, and crutches, are [covered by FSAs](https://www.investopedia.com/insurance/20-ways-use-your-flexible-spending-account/). Expenditures for prescription medications, including over-the-counter (OTC) drugs for which you had a prescription, as well as insulin, can be reimbursed with FSA funds.
*   **Reimburse amounts paid for insurance plan deductibles**: FSAs are allowed to be used for this purpose, as well as to pay back the account holder for copayments and [coinsurance](https://www.investopedia.com/terms/c/coinsurance.asp) for medical services.

> **Tip**
>
> The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in 2020 expanded reimbursable qualified medical expenses for 2020 and later years to include the cost of over-the-counter drugs without a doctor’s prescription. The act also permitted the use of FSA funds to reimburse the costs of menstrual care products. Both these CARES provisions are permanent.

### Cons

*   **Some procedures or health-related expenses aren't covered**: Expenses for surgery for cosmetic purposes and for items or services that are just beneficial for general health, [such as gym memberships](https://www.investopedia.com/ask/answers/111815/can-flexible-spending-account-fsa-be-used-gym-membership.asp), aren't reimbursable.
*   **Funds have a "use it or lose it" provision**: Generally, you must use the money in an FSA within the plan year. But your employer may offer one of two options: a "[grace period](https://www.investopedia.com/ask/answers/111314/how-does-grace-period-work-my-flexible-spending-account-fsa.asp)" of up to 2 1/2 more months to use the money in your FSA, or let you [carry over](https://www.investopedia.com/ask/answers/111615/does-money-flexible-spending-account-fsa-roll-over.asp) up to $610 from 2023 into 2024, and $640 from 2024 into 2025.
*   **Can't be used to pay for insurance premiums**: Although FSAs can cover the costs of insurance deductibles, they can't be used to pay for insurance coverage.

## Special Considerations

When the year ends or the grace period expires, any funds that remain in your FSA are lost. Thus, you should carefully calibrate the amount of money you plan to put into your account and how you intend to [spend](https://www.investopedia.com/terms/m/medical-expenses.asp) it over the course of the year.

### How Limited Purpose FSAs Work

A different type of FSA—a ["limited purpose flexible spending arrangement" (LPFSA)](https://www.investopedia.com/articles/personal-finance/012016/how-use-limited-purpose-fsa.asp)—refers to a savings plan that can be used along with a [health savings account (HSA)](https://www.investopedia.com/terms/h/hsa.asp), which isn't allowed for a standard FSA. Contributions are made using [pretax earnings](https://www.investopedia.com/terms/p/pretax-earnings.asp).

A limited-purpose FSA is more restrictive because the arrangement is reserved for paying dental and vision expenses. It is often used in conjunction with an [high-deductible health plan (HDHP)](https://www.investopedia.com/terms/h/hdhp.asp) in which a HSA is used for medical expenses associated with the HDHP.

## How Much Should I Contribute to My FSA?

No specific amount is correct for everyone, and FSA elections vary depending on each individual's particular situation. Make your election by carefully examining your expected [out-of-pocket](https://www.investopedia.com/terms/o/outofpocket.asp) health-care expenses for the coming year, up to the maximum amount allowed.

## What If My Spouse Is Enrolled In a Different Health Insurance Plan?

You can use funds from your health-care FSA to pay for eligible medical costs for both your spouse and tax dependents, regardless of the medical insurance in which they are enrolled. To use funds for your dependents, they must be claimed on your tax return, and dependents can't file their own return.  

## Can I Use an FSA with a Health Insurance Marketplace High-Deductible Plan?

You can’t use an FSA with a [Marketplace plan](https://www.investopedia.com/articles/personal-finance/101413/lowering-your-costs-marketplace-health-insurance-coverage.asp). Instead, you can set up a similar product, called a Health Savings Account (HSA). These let you to set aside money on a pretax basis to pay some health expenses if you have this type of health insurance.

## The Bottom Line

A flexible spending account (FSA) lets you set aside a portion of your earnings before tax for medical and dental expenses. It's established by an employer for employees. Employers also can contribute to employees’ FSAs as part of their compensation. Distributions from the account must be used to reimburse the employee for qualified expenses related to medical and dental services. Another type of FSA is available for dependents' care.

There's a maximum contribution limit set by the IRS for individuals each year, and most of the money must be spent in the calendar year it's saved, so FSA account holders need to carefully plan their contribution amounts to avoid losing unused funds.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans](https://www.irs.gov/publications/p969)."
>     
> 2.  Internal Revenue Service. "[Publication 503 (2022), Child and Dependent Care Expenses](https://www.irs.gov/publications/p503)."
>     
> 3.  Internal Revenue Service. "[Publication 969](https://www.irs.gov/pub/irs-pdf/p969.pdf)." Page 3.
>     
> 4.  Internal Revenue Service. "[IRS: 2024 Flexible Spending Arrangement Contribution Limit Rises by $150](https://www.irs.gov/newsroom/irs-2024-flexible-spending-arrangement-contribution-limit-rises-by-150-dollars)."
>     
> 5.  National Institutes of Health. "[Flexible Spending Accounts Program – New 2024 Limits For The HCFSA And LEX HCFSA](https://hr.nih.gov/about/news/benefits-newsletter/2023/12/flexible-spending-accounts-program-new-2024-limits-hcfsa-and)."
>     
> 6.  Healthcare.gov. "[Using a Flexible Spending Account (FSA)](https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts/)."
>     
> 7.  Internal Revenue Service. "[Publication 502 (2022), Medical and Dental Expenses](https://www.irs.gov/publications/p502)."
>     
> 8.  Internal Revenue Service. "[IRS Outlines Changes to Health Care Spending Available Under CARES Act](https://www.irs.gov/newsroom/irs-outlines-changes-to-health-care-spending-available-under-cares-act)."
>     
> 9.  U.S. Office of Personnel Management. "[Flexible Spending Account](https://www.opm.gov/frequently-asked-questions/insure-faq/flexible-spending-account/what-is-a-limited-expense-health-care-fsa-lex-hcfsa/)."
>     
> 10.  Internal Revenue Service. "[Publication 969](https://www.irs.gov/pub/irs-pdf/p969.pdf)." Page 9.