What Is an FSA?

Find out how a flexible spending account could benefit your wallet.


If you have the option of getting a Flexible Spending Account through your insurance at work, you should know exactly what it involves and how you can take advantage of this benefit. Incorporating an FSA into your healthcare plan can mean big savings for you and your dependents.

If you anticipate incurring a lot of medical expenses in the next year or must care for a dependent, participating in a healthcare FSA or dependent care FSA could be highly beneficial. Learn all about this employer-sponsored benefit so you can decide if it will work for you.

Read: How Your Employee Benefits Can Help You Save Over $750 Every Month

What Is a Flexible Spending Account?

A Flexible Spending Account, also referred to as a flexible savings account or flexible savings arrangement, is a dedicated account for certain out-of-pocket healthcare expenses. An FSA is funded by the account owner. Some employers might also fund their employees’ accounts, but employers are not required to contribute.

Make Your Money Work for You

Typically, during your benefits enrollment period, you will designate an amount you want to put aside for your FSA. After confirming what products and services are eligible to be paid for with FSA funds, you might budget for dental, vision, and medical expenses for the year to decide the amount you want to put in your account. Money is then deducted from each of your paychecks, before taxes are taken out, to fund your FSA. The full amount you designated for your FSA might be available to you right away, depending on your insurance provider.

You can gain access to an FSA through your employer; such an account might be offered as part of a benefits package.  This means that those who are self-employed or unemployed do not have access to FSAs. However, self-employed or unemployed individuals can access a similar program called a Health Savings Account.

A dependent care FSA covers the work-related cost of care for a qualifying dependent. Eligible dependents include children 13 years of age and younger and physically or mentally disabled parents or spouses.

Make Your Money Work for You

FSA-Eligible Expenses

FSA funds can be used for you, your spouse and eligible dependents for a variety of medical and health-related expenses. These expenses include:

  • Prescription medications
  • Over-the-counter medicine with a doctor’s prescription
  • Insulin without a medical prescription
  • Medical equipment like crutches, bandages and blood sugar test kits

Eligible expenses might also include co-pays, dental night guards, contacts and eyeglasses.

FSA Rules and Limitations

A few important rules exist around having an FSA. Understand them so you can better decide if and how to use such an account for yourself:

  • Annual limits: Each individual with an FSA can fund it with up to $2,550 per year per employer. The same goes for a spouse: He is also able to fund an FSA up to $2,550 per year.
  • Use-it-or-lose-it policy: The FSA program employs a “use it or lose it” approach: If you don’t use the funds in your FSA, you’ll lose them at the end of the plan year.
  • Grace period: Fortunately, there is an FSA grace period: If you don’t use all your FSA funds by the end of the plan year, you have an additional two and a half months to use the money in your account.
  • Carryover: Some FSA plans allow account holders to carry over up to $500 per year to use in the following year.

Make Your Money Work for You

Benefits plans are not required to offer the grace period or the ability to carry over funds, so it’s important to find out the terms of your policy so you can plan your medical flexible spending account funds accordingly.

Use the Tax Advantage of an FSA

The main benefit of an FSA is that your account is funded with pre-tax money. So all the money you put into this account and use is not subject to taxes. Depending how much money you put in your FSA, that can add up to a significant amount — especially if you use the program multiple years.

The simple answer to whether Flexible Spending Accounts are worth considering is yes, especially if you will spend money on a co-pay or deductible, get a procedure like LASIK or buy prescription drugs within one year of opening your account. Because each person’s healthcare needs are different, it’s up to you to determine your needs and anticipated medical expenses. Because unused funds can be lost, it’s wise to carefully estimate how much money you’ll spend on eligible healthcare in the following 12 months when you’re enrolling in an FSA.

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About the Author

Natalie Campisi

Natalie Campisi is a Los Angeles-based writer and producer with more than 17 years of experience. She started her career as a journalist, reporting for dailies, the Associated Press and on Capitol Hill. She’s produced podcasts, commercials and online video content for everyone from tech startups to chocolatiers.

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What Is an FSA?
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