Flexible Spending Account (FSA): Should You Get One?

Americans have many health care options. On top of HMO, PPO, and other types of health plans, you can get various health savings accounts like an HSA or FSA. In this article, we’ll discuss what an FSA is, how it works, its pros and cons, and more.

What Is A Flexible Spending Account (FSA)?

A flexible spending account (FSA) is an employer-sponsored savings account that lets you set aside pretax dollars for qualified medical expenses. Typically, funds are withheld from your paycheck before tax, and you have up to the end of the plan year (barring any potential grace periods) to withdraw them tax-free for health care costs. This means FSA holders can realize significant tax savings.

However, FSAs aren’t so flexible that you can spend their funds on just anything. For example, FSA funds can be used to pay deductibles and copayments, but not insurance premiums. They can also be used for prescription medicines and medical equipment, but not items merely beneficial to general health, such as vitamins.

HSA Vs. FSA

A health savings account (HSA) is like an FSA in that it lets you set aside pretax earnings for medical expenses. However, there are key differences between an HSA and an FSA.

For example, you can open an HSA independent of your employer and roll over funds from year to year. HSAs also have higher contribution limits and let you invest funds once you reach a certain balance and withdraw them for non-medical expenses for a penalty. However, to qualify for an HSA, you need a high-deductible health insurance plan.

How Do FSAs Work?

During open enrollment season, you can enroll in an FSA for the upcoming plan year and set how much money to contribute from each paycheck (up to the IRS contribution limit). Some employers may also contribute to your FSA (without it counting toward the IRS contribution limit), but this is not required. In either case, the IRS doesn’t treat FSA contributions as income.

Throughout the plan year, you can use your FSA funds to pay for qualified medical expenses. Some FSAs provide a debit card to make purchases. Others require you to pay out of pocket and submit receipts for reimbursement.

Importantly, you must use FSA funds within the plan year. Otherwise, you forfeit them. This “use it or lose it” rule requires that you plan your FSA contributions carefully.

FSA Contribution Limits For 2024

As mentioned, the IRS sets limits on how much can go into an FSA. The current amounts are:

• Health Care FSA (HCFSA) or Limited Expense Health Care FSA (LEX HCFSA): Participants may contribute up to an annual maximum of $3,200.
• Dependent Care FSA (DCFSA): It’s possible to contribute $5,000 per household or $2,500 if married filing separately.

We’ll dive further into these types of FSAs below.

Types Of Flexible Spending Accounts

There are three main types of FSAs:

• Health Care FSA (HCFSA): This is a standard FSA that can be used to cover medical, dental, and vision expenses.
• Limited Expense Health Care FSA (LEX HCFSA): Funds from this FSA type can only be used for special purposes, such as vision or dental expenses. Consequently, it’s also the only FSA type that you can hold alongside an HSA.
• Dependent Care FSA (DCFSA): This is an FSA dedicated to paying for the care of dependents (children under the age of 13 or disabled family members). For example, DCFSAs can be used to pay for daycare or senior care programs.

How To Use A Flexible Spending Account

Now that you know about different types of FSAs, here’s what you can use them on:

Though not an exhaustive list of eligible FSA expenses, the above gives you an idea of what types of things are covered.

Benefits And Drawbacks Of FSAs

Of course, whether you should fund an FSA depends on your circumstances. Here are the pros and cons to consider:

Benefits Of Funding An FSA

• Contributions aren’t subject to tax
• Employers can (but aren’t required to) contribute
• Covers most out-of-pocket medical expenses
• Funds are often easy to access via debit card

Drawbacks Of Funding An FSA

• Unused funds don’t roll over from year to year and can’t be transferred from job to job
• Contributions are limited by the IRS
• You employer doesn’t have to offer an FSA
• Funds can’t be used to pay for insurance premiums

Flexible Spending Account FAQs

Here are answers to frequently asked questions regarding flexible spending accounts:

Do I need an FSA?

Not necessarily. It depends on your financial situation, needs, and preferences. For example, an FSA may be a good idea if you anticipate regular medical expenses or want to lower your taxable income. However, if you rarely need medication or visit the doctor, qualify for and prefer an HSA, or worry about the use-it-or-lose-it rule, an FSA may not be the best option.

Is an FSA worth it?

Gauging whether an FSA is worth it requires carefully weighing the pros and cons. On the one hand, FSAs offer tax advantages and a way to streamline your healthcare budgeting. On the other hand, you risk forfeiting funds due to the use-it-or-lose-it rule, and your contributions and eligible expenses are limited. 

Can an employer contribute to an FSA?

The Bottom Line: An FSA Can Help You Cover An Array Of Expenses

Ultimately, flexible spending accounts let you pay for most out-of-pocket medical expenses with pretax dollars. This can help you budget for anticipated medical expenses like prescribed medicines and regular doctor visits while saving money.