What is FSA?

An FSA is an employer-sponsored account where you set aside pre-tax money for medical or dependent care expenses. Use it or lose it by year-end. It allows employees to contribute pre-tax dollars from their salaries to pay for qualified medical expenses or dependent care costs. Because contributions are deducted from salary before federal income, Social Security, and Medicare taxes are calculated, FSAs reduce the employee's taxable income.

For the 2026 tax year, the contribution limit for a health FSA is $3,400 (up from $3,300 in 2025). Unlike HSAs, FSAs are subject to a strict 'use-it-or-lose-it' rule. Employees must generally spend all contributed funds within the plan year. Plans may offer a grace period of up to 2.5 months or allow a carryover of unused funds, up to $680 for plan years starting in 2026 ($660 in 2025). Any excess unused funds are forfeited to the employer.

FSAs are owned by the employer. If an employee leaves their job during the plan year, they forfeit any remaining balance. However, they can access the full annual election amount on day one of the plan year, before contributions are fully deducted.

In addition to Health FSAs, employers may offer Dependent Care FSAs (DCFSAs) and Limited Purpose FSAs (LPFSAs). A DCFSA allows employees to contribute up to $5,000 pre-tax ($2,500 if married filing separately) to cover childcare for children under age 13 or care for a disabled dependent. LPFSAs are designed specifically to run alongside Health Savings Accounts (HSAs); they restrict qualified expenses to dental and vision care only, allowing taxpayers to preserve their HSA balances for long-term tax-free investment compounding. Under the IRS Uniform Coverage Rule, the entire annual Health FSA election amount must be available to the employee on the first day of the plan year. This creates a unique cash flow advantage for the employee, who can spend the full balance immediately, and a matching financial risk for the employer, who cannot recover spent funds if the employee terminates their employment mid-year.