A Flexible Spending Account (FSA) is a savings account that allows employees to set aside pre-tax dollars for healthcare, dependent care, or “limited purpose” expenses, such as vision or dental care. An FSA may also be called a Flexible Spending Arrangement. What an FSA will pay for depends on the type of account.
Both employees and their employer can contribute to an FSA, but the IRS does limit how much an individual can contribute to their account per year. The amount an employer contributes does not affect the maximum amount that an employee can contribute. For health and limited purpose FSAs, the maximum is $3300 for 2025, and for dependent care FSAs, the maximum is $5000 for 2025.
Employees should keep in mind, though, that FSAs do not roll over from year to year. The IRS does give employers the option to extend a grace period for two-and-a-half months, and some plans allow up to $550 per year to roll over. But typically, any remaining FSA funds return to the employer once the plan year expires.
The tax-free advantage of FSAs is one reason why they are such a popular benefit. It essentially means that employees can save about 30% on qualified expenses.
Health FSA funds can be used to pay for or to reimburse payment for qualified medical expenses, such as copays, prescriptions, physical therapy, and certain healthcare products.
Dependent care FSAs can be used to pay for licensed daycare, adult dependent care providers, and summer camps.
Limited-purpose FSAs typically cover dental and vision care, but there are some FSAs designed for commuter benefits and adoption services as well.
To be clear, though, there are no “universal” FSAs that cover all of the products and services mentioned above. Instead, the type of FSA dictates what qualifies as a reimbursable expense. That’s why most FSAs are not compatible with an HSA—but some are.
For more information, check out our blog on FSA-Eligible Products.
FSAs are often confused with HSAs—or Health Savings Accounts—but there are some key differences:
For these reasons, you may be wondering if an employee can have both an FSA and an HSA at the same time. Yes, but only under limited circumstances. According to the IRS, health FSAs are considered “other health coverage,” which makes them incompatible with an HSA. However, limited purpose, dependent care, and commuter benefit may be paired with an HSA.
Both of these tax-advantaged accounts can help employees save significantly on qualifying expenses. That’s why they make such a competitive benefit for employers.
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