FSA Explained: How to Use Pre-Tax Dollars to Pay for Medical and Dependent Care

What Is a Flexible Spending Account?

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows you to set aside pre-tax dollars from your paycheck to pay for qualified healthcare or dependent care expenses. Because contributions come from pre-tax income, an FSA effectively reduces your taxable income and can save you 20–40% on eligible expenses depending on your tax bracket.

FSAs are governed by IRS rules and offered exclusively through employers. Unlike a Health Savings Account (HSA), you do not need to be enrolled in a specific type of health plan to use a healthcare FSA—you just need to have an employer who offers one.

Types of FSAs

There are three main types of FSAs, each with different eligible expenses and limits:

Healthcare FSA

The most common type, a healthcare FSA, covers medical, dental, and vision expenses. For 2024, you can contribute up to $3,200 per year. This limit applies per employee, not per household, so both spouses can each contribute up to $3,200 if they each have access to an FSA through their respective employers.

Dependent Care FSA

A dependent care FSA (DCFSA) covers childcare and dependent care expenses for children under 13 or qualifying dependents who cannot care for themselves. The annual limit is $5,000 per household ($2,500 if married filing separately). Eligible expenses include daycare, after-school programs, summer day camps, and in-home childcare providers.

Limited-Purpose FSA

A limited-purpose FSA can only be used for dental and vision expenses. It is designed for people who also have an HSA (since having a regular healthcare FSA disqualifies you from contributing to an HSA). Using a limited-purpose FSA lets you preserve HSA funds for other medical expenses while still saving pre-tax dollars for dental and vision care.

How an FSA Reduces Your Tax Bill

FSA contributions are deducted from your paycheck before federal income taxes, Social Security taxes, and Medicare taxes are calculated. For someone in the 22% federal tax bracket who contributes $3,200 to a healthcare FSA, the tax savings work out as follows:

• Federal income tax savings (22%): $704
• Social Security tax savings (6.2%): $198
• Medicare tax savings (1.45%): $46
• Total tax savings: approximately $948

That’s nearly $950 in savings on expenses you were going to pay anyway. If you also contribute the $5,000 to a dependent care FSA, your combined tax savings could exceed $2,500 per year.

The Use-It-or-Lose-It Rule

The biggest drawback of an FSA is the use-it-or-lose-it rule: you must use your FSA funds by the end of the plan year or forfeit them back to your employer. However, the IRS provides two possible relief options that employers may (but are not required to) offer:

• Grace period: An additional 2.5 months after year-end to incur eligible expenses (through March 15 for calendar-year plans)
• Carryover: The ability to roll over up to $640 (2024) of unused funds to the next plan year

Importantly, an employer can only offer one of these options, not both. Check your Summary Plan Description to know which option (if any) your employer offers, and plan your spending accordingly.

The Healthcare FSA “Front-Loading” Feature

One unique and advantageous feature of a healthcare FSA is that the full annual election amount is available on January 1 (or your enrollment date), even before you’ve contributed that much via payroll deductions. So if you elect $3,200 for the year and have a $2,800 dental procedure in February, you can use your entire $3,200 balance immediately—even if you’ve only contributed $300 so far.

This is a meaningful benefit that HSAs do not offer. You are borrowing against your future contributions. If you leave the job before making all your contributions but after spending from a front-loaded FSA, you generally keep the difference. Conversely, if you leave with money in the FSA, you lose whatever you haven’t spent (unless you elect COBRA continuation for the FSA).

FSA Eligible Expenses

The IRS defines qualified medical expenses in Publication 502. Common FSA-eligible expenses include:

• Doctor, urgent care, and specialist copays
• Prescription medications
• Over-the-counter medications (since 2020): pain relievers, cold and flu medicine, antacids, allergy medications
• Dental care: cleanings, X-rays, fillings, crowns, orthodontics
• Vision care: eye exams, glasses, contact lenses and solution, LASIK surgery
• Mental health services: therapy, counseling
• Physical therapy
• Medical equipment: crutches, bandages, glucose monitors, blood pressure cuffs
• Feminine hygiene products (since 2020)
• Sunscreen SPF 15+ (since 2020)

Expenses that are not FSA-eligible include cosmetic surgery, gym memberships, teeth whitening, vitamins and supplements (unless prescribed), and health insurance premiums.

How to Decide How Much to Contribute

Determining the right contribution amount is the trickiest part of FSA planning. Since unused funds are forfeited, it’s better to be conservative. Start by reviewing your previous year’s healthcare spending. Add up all out-of-pocket costs: copays, deductibles, prescriptions, dental work, vision care.

If you know you have a planned expense in the coming year (braces, surgery, new glasses), include that in your estimate. Be careful not to over-contribute unless you have a very clear picture of your expected spending. A safe starting point for most people is 80–90% of your estimated expenses to leave a buffer.

Maximizing FSA Benefits

A few strategies to get the most out of your FSA:

• Stock up on FSA-eligible OTC items near year-end if you have remaining funds. Bandages, medications, and other items stay on your shelf.
• Use your FSA for large annual expenses like dental cleanings, eye exams, and glasses to systematically drain the account.
• Set a calendar reminder in October or November to check your balance and schedule any needed appointments before year-end.
• Use a debit card from your FSA provider for easy access—most accounts come with a card pre-loaded with your election amount.

FSA vs. HSA: Key Differences

The main differences are: FSAs are use-it-or-lose-it (with limited carryover), while HSAs accumulate indefinitely. FSAs are available with any health plan, while HSAs require an HDHP. FSA funds are available immediately up to your full election; HSA funds are only available as you contribute. For long-term savers, the HSA is generally superior, but an FSA is valuable for those without HDHP eligibility or who want to use the front-loading feature.