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Part of the Series Medical Savings and Spending AccountsTypes of Accounts
How The Accounts Differ
All About Flex Spending Accounts
All About Health Savings Accounts
A flexible spending account (FSA) is a type of savings account that provides the account holder with specific tax advantages. An FSA is sometimes called a “flexible spending arrangement” and can be established by an employer for employees.
The account allows you to contribute a portion of your regular earnings before tax; employers also can contribute to employees’ FSAs. Distributions from the account must be used to reimburse the employee for qualified expenses related to medical and dental services.
Another type of FSA is a dependent-care flexible spending account, which is used to pay for childcare expenses for children age 12 and under and also can be used to pay for the care of qualifying adults, including a spouse, who can't care for themselves and meet specific Internal Revenue Service (IRS) guidelines. A dependent-care FSA has different maximum contribution rules than a medical-related FSA.
One of the key benefits of a flexible spending account is that the funds contributed to the account are deducted from your earnings before taxes, lowering your taxable income. As a result, regular contributions to an FSA can reduce your annual tax liability.
The IRS limits how much can be contributed to an FSA each year. For medical expense FSA accounts, the annual contribution limit is $3,200 for 2024.
If you are married, your spouse also can put aside up to the annual contribution limit through their employer. Employers can choose to contribute to an FSA, but they don't have to—if they do, their contribution doesn't reduce the amount that you are permitted to contribute. You aren't taxed on employer contributions.
For 2024, the contribution limit for a dependent-care FSA is $5,000 for joint and individual tax returns and $2,500 for married taxpayers filing separately.
The IRS in 2021 released guidance that allowed employers more flexibility for benefit plans during the COVID-19 crisis, including special provisions for health Flexible Spending Arrangements (FSAs). Most of these provisions ended at the beginning of 2023 except for some carryover periods for leftover funds that extend into the first months of the year.
Besides their tax benefits, FSAs offer several advantages for account holders, but they don't cover all manner of medical or dental expenses. Here are some of their pros and cons.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in 2020 expanded reimbursable qualified medical expenses for 2020 and later years to include the cost of over-the-counter drugs without a doctor’s prescription. The act also permitted the use of FSA funds to reimburse the costs of menstrual care products. Both these CARES provisions are permanent.
Taxpayers in September 2021 were notified by the IRS that at-home COVID-19 tests and personal protective equipment such as face masks and hand sanitizer were considered eligible medical expenses that can be paid for or reimbursed by FSAs, health savings accounts (HSAs), and health reimbursement arrangements (HRAs).
When the year ends or the grace period expires, any funds that remain in your FSA are lost. Thus, you should carefully calibrate the amount of money you plan to put into your account and how you intend to spend it over the course of the year.
A different type of FSA—a "limited purpose flexible spending arrangement" (LPFSA)—refers to a savings plan that can be used with a health savings account (HSA), which isn't allowed for a standard FSA. Contributions are made using pretax earnings.
A limited-purpose FSA is more restrictive because the arrangement is reserved for paying dental and vision expenses. It is often used in conjunction with an high-deductible health plan (HDHP) in which a HSA is used for medical expenses associated with the HDHP.
No specific amount is correct for everyone, and FSA elections vary depending on each indidvidual's particular situation. Make your election by carefully examining your expected out-of-pocket healthcare expenses for the coming year.
You can use funds from your healthcare FSA to pay for eligible medical costs for both your spouse and tax dependents, regardless of the medical insurance in which they are enrolled. To use funds for your dependents, they must be claimed on your tax return, and dependents can't file their own return.
You can’t use an FSA with a Marketplace plan. Instead, you can set up a similar product, called a Health Savings Account (HSA). These let you to set aside money on a pretax basis to pay some health expenses if you have this type of health insurance.
A flexible spending account (FSA) lets you set aside a portion of your earnings before tax for medical and dental expenses. It's established by an employer for employees. Employers also can contribute to employees’ FSAs. Distributions from the account must be used to reimburse the employee for qualified expenses related to medical and dental services. Another type of FSA is available for dependents' care.
There's a maximum contribution limit for individuals each year, and most of the money must be spent in the calendar year it's saved, so FSA account holders need to carefully plan their contribution amounts to avoid losing unused funds.
Article SourcesTypes of Accounts
How The Accounts Differ
All About Flex Spending Accounts
All About Health Savings Accounts
A Health Savings Account (HSA) is an account for individuals with high-deductible health plans to save for medical expenses that those plans do not cover.
A health reimbursement arrangement (HRA) is an employer-funded plan that reimburses employees for medical expenses and, sometimes, insurance premiums.
A health insurance deductible is the amount of money you must pay out of pocket each year before your insurance plan benefits kick in. Learn how health insurance deductibles work.
A PPO is an arrangement with an insurance company in which a network of medical professionals and facilities provide services at reduced rates.
Medicare Supplement open enrollment only happens once, according to federal guidelines. Don’t miss out on your chance to buy a Medigap plan.
Medicare Advantage open enrollment happens every year from January 1 through March 31. Use the time before open enrollment begins to research and compare your options.
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