Health FSA (Flexible Spending Account)

An employer-sponsored pre-tax account for healthcare expenses — reducing your taxable income on qualified medical, dental, and vision costs — but funds typically expire if not used by year-end.

A Health Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax dollars from their paycheck to pay for qualified medical, dental, and vision expenses. Contributions are excluded from federal income tax, Social Security tax, and Medicare tax — making an FSA one of the most efficient ways to cover predictable healthcare costs. The employee elects a contribution amount during open enrollment, and that amount is divided across pay periods as a payroll deduction. The key feature that distinguishes FSAs from HSAs: the full annual election amount is available on January 1 (or the plan start date), even though contributions are deducted throughout the year — meaning the account is pre-funded by the employer and the employee's payroll deductions repay it over time.

The use-it-or-lose-it rule is the defining limitation of the Health FSA. Unlike an HSA, funds in an FSA that aren't spent by the plan year's deadline are forfeited — they revert to the employer. The IRS allows two limited exceptions: a grace period of up to 2.5 months into the following plan year (so a December 31 plan year end extends to March 15 of the following year) or a carryover of up to $640 (2024 limit, indexed annually). Employers must choose one option or neither — they cannot offer both simultaneously. This use-it-or-lose-it constraint makes FSA planning critical: elect too much, and you forfeit unused funds; elect too little, and you're paying after-tax for expenses that could have been pre-tax.

The 2024 contribution limit for a Health FSA is $3,200 per employee (this limit applies per employee, so a married couple with access to separate FSAs through their respective employers can each contribute up to $3,200). Qualified expenses are broad and similar to those for HSAs: deductibles and cost-sharing under health plans, prescription drugs, over-the-counter medications and menstrual care products, dental care, vision care including glasses and contacts, and certain medical equipment. The FSA can be used as soon as the plan year begins — on day one of employment if benefits start then — even before you've contributed the full election amount through payroll deductions.

The FSA's pre-funding feature creates an underappreciated risk: if you resign or are terminated before the end of the plan year, you keep access to the full-year election amount that has already been spent — but the employer may not be able to recover unearned contributions for expenses already paid. This is a structural asymmetry in the employee's favor: if you elect $3,000, spend $2,500 by March, and then leave the company having contributed only $750, the employer absorbs the $1,750 shortfall. Conversely, if you haven't spent anything and leave in December, you forfeit any unused balance unless COBRA continuation coverage is elected — which would allow you to continue using FSA funds for the remainder of the plan year while paying premiums on a post-tax basis.

What FSA Funds Can Pay For

  • Health plan cost-sharing: deductibles, copayments, coinsurance — the out-of-pocket amounts you pay under your health plan.
  • Prescription drugs: all FDA-approved prescription medications qualify.
  • Over-the-counter medications: allergy medication, pain relievers, cold medicine, antacids — no prescription required as of 2020.
  • Dental care: cleanings, x-rays, fillings, crowns, bridges, dentures, orthodontia.
  • Vision care: eye exams, prescription glasses, contact lenses, contact solution, LASIK.
  • Menstrual care products: tampons, pads, menstrual cups qualify as of 2020.
  • Medical equipment and supplies: blood pressure monitors, blood sugar monitors, bandages, crutches.
  • Does not qualify: cosmetic procedures, gym memberships, vitamins and supplements without a medical prescription, health insurance premiums.

Planning Your FSA Election

  • Estimate your predictable expenses: review last year's EOBs (Explanation of Benefits) from your insurer to identify your typical annual out-of-pocket spending.
  • Schedule upcoming costs: known expenses (braces, planned surgery, LASIK, a year of therapy) should drive your election above your typical baseline.
  • Use the conservative floor: if you're uncertain, elect at least the amount you're confident you'll spend — you can always use FSA funds for unexpected expenses.
  • Know your plan's rollover rule: if your plan offers a $640 carryover, you have more tolerance for slight over-election than if you'll forfeit 100% of unused funds.
  • Don't over-elect speculatively: electing $3,200 because 'it would be nice to have' without a plan to spend it almost guarantees forfeiture — the tax savings don't offset losing unused dollars.
  • Year-end spending: if you have remaining FSA funds in November, stock up on eligible OTC items, schedule overdue dental or vision appointments, or prepay January prescriptions.

Types of FSAs

  • Health FSA (general-purpose): covers medical, dental, and vision expenses — the most common type; cannot be paired with an HSA-eligible HDHP.
  • Limited-Purpose FSA: covers only dental and vision expenses — can be paired with an HSA to preserve full HSA contribution eligibility while still getting pre-tax dental/vision coverage.
  • Dependent Care FSA: a separate account (maximum $5,000 per household) for eligible childcare and dependent care expenses — does not count toward the $3,200 Health FSA limit.
  • COBRA and FSA: if you leave employment mid-year with a positive FSA balance, you can elect FSA continuation under COBRA — paying monthly premiums to maintain access to remaining funds through year-end.

Example

A teacher elects $2,000 in her Health FSA during open enrollment, estimating $800 in dental work, $400 in prescription copays, and $600 in contact lens purchases. On January 2, the full $2,000 is available. In February, she pays $850 for a crown — reimbursed from the FSA in full. By September she has spent $1,650 against her $2,000 election. In November she realizes she has $350 remaining and hasn't scheduled an overdue eye exam. She schedules the exam and orders new glasses, using the remaining $350 from the FSA before December 31. Her employer's plan has no rollover — any unused funds would have been forfeited. The $2,000 election saved her approximately $620 in federal income and FICA taxes.