A flexible spending account, or FSA, is an employer-sponsored benefit that allows participants to set aside pre-tax funds from their paychecks to help them pay for approved out-of-pocket healthcare or dependent care expenses. FSAs are an annual plan-year benefit–meaning funds will either expire or a portion of the funds roll over to the following year, depending on your employer’s plan. You’ll want to spend down this account every year based on your plan’s rules.
Most people have expenses through the course of the year that they will need to pay with their own money “out-of-pocket.” The advantage of setting aside your funds in an FSA is that you never pay taxes on this money. So, every time you spend it on your out-of-pocket health and dependent care expenses, it’s like getting a 25%-30%* discount!
*Tax rates may vary, depending on income and other factors.
The most well-known FSA is the healthcare FSA (HCFSA). This plan covers many eligible expenses, such as prescriptions, co-pays, over-the-counter treatments, medical equipment, lab fees, hospital expenses and more.
A dependent care FSA (DCFSA) can be paired with almost any other kind of consumer account. It is an account to help participants pay for out-of-pocket child care or other dependent care (disabled spouse/child or elder care) expenses. Maximum contributions for DCFSA plans are $5,000/year for family or $2,500/year for married, filing separately.
The limited purpose FSA (LPFSA) is typically paired with a health savings account (HSA). The funds a participant sets aside for their LPFSA are restricted to vision and dental eligible expenses, such as annual exams, prescription glasses and contacts, fillings, non-cosmetic dental work, and more.