What Is a Flexible Spending Account (FSA)?
Quick Answer
A Flexible Spending Account (FSA) is an employer-sponsored account that lets you set aside pre-tax dollars for healthcare expenses, reducing both your income tax and FICA taxes. The 2025 limit is $3,300 for healthcare FSAs. Unlike an HSA, you do not need a high-deductible health plan, but FSA funds generally must be used within the plan year or they are forfeited.
How an FSA Works
- During open enrollment, you choose how much to contribute (up to $3,300 for healthcare)
- Your employer deducts that amount evenly from your paychecks throughout the year, pre-tax
- You use the funds to pay for eligible medical expenses (copays, prescriptions, glasses, dental work, etc.)
- The full annual election is available from day one of the plan year — you don't have to wait for contributions to accumulate
Types of FSAs
| FSA Type | 2025 Limit | Eligible Expenses |
|---|---|---|
| Healthcare FSA | $3,300 | Medical, dental, vision, prescriptions, copays |
| Dependent Care FSA | $5,000/household | Daycare, after-school care, summer camp, elder care |
| Limited Purpose FSA | $3,300 | Dental and vision only (for HSA holders) |
Tax Savings From an FSA
FSA contributions reduce both income tax and FICA taxes. Here is the savings on a full $3,300 healthcare FSA contribution:
| Tax | Savings |
|---|---|
| Federal income tax (22% bracket) | $726 |
| State income tax (5% example) | $165 |
| Social Security (6.2%) | $204.60 |
| Medicare (1.45%) | $47.85 |
| Total savings | $1,143.45 |
Real Example With Actual Numbers
Mark earns $72,000 in New York and contributes $3,300 to his healthcare FSA and $5,000 to his dependent care FSA (he has a toddler in daycare).
| FSA Contribution | Annual | Tax Savings |
|---|---|---|
| Healthcare FSA | $3,300 | ~$1,200 |
| Dependent Care FSA | $5,000 | ~$1,800 |
| Total | $8,300 | ~$3,000 |
Mark saves about $3,000 per year in taxes by using FSAs — that is $250/month extra in take-home pay. The money still pays for his existing medical and childcare expenses; it just does so with pre-tax dollars.
His biweekly FSA deduction: $8,300 / 26 = $319.23. But the tax savings mean his take-home only drops by about $204 per paycheck. Check your numbers at the SalaryHog calculator.
The Use-It-or-Lose-It Rule
The biggest drawback of FSAs is that unused funds are typically forfeited at the end of the plan year. Your employer may offer one of these relief options:
| Option | Details |
|---|---|
| Grace period | Extra 2.5 months to use remaining balance |
| Carryover | Up to $640 rolls into the next plan year |
| Neither | Forfeit unused balance entirely |
To avoid losing money:
- Estimate expenses conservatively
- Consider known upcoming expenses (glasses, dental work, prescriptions)
- Use remaining funds on eligible items like contact solution, sunscreen, first-aid supplies, and OTC medications before the deadline
FSA vs HSA
| Feature | FSA | HSA |
|---|---|---|
| Requires HDHP | No | Yes |
| Rolls over | Limited ($640) | Unlimited |
| Investment option | No | Yes |
| Portable | No | Yes |
| Full amount available day one | Yes | No (only what's contributed) |
| FICA tax savings | Yes | Yes (via payroll) |
If you have access to both (through a Limited Purpose FSA paired with an HSA), you can use the FSA for dental and vision while saving the HSA for other medical expenses or long-term investment.
Dependent Care FSA: A Separate Benefit
The dependent care FSA is separate from the healthcare FSA. It allows up to $5,000 per household for child or elder care expenses while you work. At a 22% federal bracket with FICA savings, $5,000 in contributions saves roughly $1,800 in taxes.
Compare this to the Child and Dependent Care Tax Credit — in most cases, the FSA provides greater savings for families with moderate-to-high incomes. Lower-income families may benefit more from the credit.
Estimate your FSA savings alongside other deductions at the SalaryHog calculator.