Flexible Spending Account (FSA): Overview, Pros & Cons, Uses

What is an FSA?

An FSA, or flexible spending account, is an employer-sponsored account that you use to pay for medical or dependent care expenses that aren't covered by insurance. You fund the account with pre-tax money, meaning that contributions will lower your tax bill. Some employers also make FSA contributions on employees’ behalf, though this perk is relatively uncommon.

You sign up for an FSA during open enrollment or when you sign up for benefits after you’re hired. When you enroll, you’ll also choose how much to contribute for the year -- which you can’t change unless you have a qualifying life event, like a marriage, divorce, birth or adoption of a child, or you leave your job.

FSA contributions are “use it or lose it” -- if you don’t spend your funds by the end of the year, you’ll forfeit that money to your company. Employers can offer you the option of either a two-and-a-half-month grace period OR a limited carryover of funds (up to $660 from 2025 to 2026), but not both. Because funds are employer-owned, you also forfeit your balance if you leave your job for any reason.

Types of FSAs

When you sign up for a flexible spending account, you’ll also need to decide which type of FSA you’re funding: a healthcare FSA (also called a medical FSA) or a dependent care FSA. You can have both types of FSAs, but you’ll need to make separate elections.

Healthcare FSA

Healthcare FSAs are used for medical, dental, and vision expenses that aren’t covered by insurance. A healthcare FSA typically makes you ineligible to fund a health savings account (HSA) unless you have a limited-purpose FSA, which can only be used for dental and vision care. You can use healthcare FSA funds on expenses incurred by you, your spouse, or a tax dependent.

You can contribute up to $3,300 to a healthcare FSA in 2025, or $3,400 in 2026. Because these limits are per individual, you and your spouse could each contribute up to these limits if you both work for companies that offer a healthcare FSA.

Note that if you have a healthcare FSA, your full year's contributions are immediately available on day one -- and you don't have to reimburse your employer if you leave your job at some point during the year.

For example, suppose you elect to contribute $100 each month, or $1,200 total, to a healthcare FSA in 2026. You'd have access to the entire $1,200 in January 2026, even though the full amount hasn't accrued. If you left your job in February 2026 after spending the full $1,200 but only contributing $200, your employer would forfeit the remaining $1,000.

Dependent care FSA

A dependent care FSA is an account that’s used for childcare expenses for a child under 13, including daycare, preschool, and summer day camp, or costs of caring for a spouse or adult dependent who lives with you but can’t care for themselves.

Contribution limits are per household, rather than per individual. If you’re head of household (the IRS filing status for single people who have dependents) or married filing jointly, you can contribute up to $5,000 in 2025, or $7,500 in 2026. If you’re married filing separately, the limits are $2,500 in 2025 and $3,750 in 2026. Unlike with a medical FSA, a dependent care FSA doesn’t affect your HSA eligibility.

Unlike healthcare FSA funds, contributions to a dependent care FSA are only available to you as they accrue. For example, if you've elected to contribute $1,200 but you've only made $200 in contributions, you'd only be able to get reimbursement for $200 worth of expenses.

Pros and cons of an FSA

Advantages of an FSA include:

• You won't pay taxes on contributions. FSA contributions are made pre-tax, which means they'll lower your taxable income for the year.
• Convenience. You fund an FSA with automatic payroll deductions, which makes it a convenient way to save. Many companies provide you with an FSA debit card so you can easily use the account for expenses, though some employers require you to submit a claim for reimbursement.
• Entire healthcare FSA contribution is available at the beginning of the year. You can access the entire amount you elect to contribute to a healthcare FSA at the start of the year without waiting for funds to accrue. However, this isn't the case for dependent care FSAs, which only allow you to seek reimbursement as your contributions accrue.

Disadvantages of an FSA include:

• Contributions are "use-it-or-lose-it." Your employer technically owns funds in an FSA. If you have a remaining balance at the end of the year, you'll forfeit the remaining balance, though some employers permit a grace period or carryover. If you leave your job midyear, you surrender any leftover funds.
• Healthcare FSAs aren't compatible with an HSA. You won't be allowed to contribute to a medical FSA while you have a healthcare FSA. However, you can have both an HSA and a limited-purpose FSA that only reimburses you for dental or vision care.
• No ability to change election during the year. Unlike with 401(k)s or HSAs -- which allow you to change your contribution as frequently as your employer permits -- you can't change your FSA contributions at any time. You'll need to wait until open enrollment to make changes, and they won't take effect until the beginning of the next year.

Real-world example of an FSA

Suppose your company offers FSAs to employees. You know you need dental work that will carry significant out-of-pocket costs, so you elect to contribute $200 per month to a healthcare FSA, or $2,400 for the entire year.

You don't want to delay your dental care, so you schedule your procedure in January. Your total out-of-pocket cost is $1,500, and you're reimbursed for the full amount -- even though you've only contributed $200, because your entire elected contribution is immediately available at the start of the year.

But you forget that your funds are use-it-or-lose-it, so you don't submit additional claims for reimbursement during the year. You've still lowered your taxable income by $2,400 for the year -- but you've also forfeited the remaining $900 to your employer.

The lesson: FSAs are usually best for predictable, recurring expenses.