Flexible Spending Account (FSA)
An employer-sponsored pre-tax account used to pay for eligible healthcare or dependent-care expenses.
What is FSA?
A Flexible Spending Account (FSA) is an employer-sponsored benefit that lets employees set aside pre-tax payroll dollars to pay for qualified out-of-pocket medical expenses (healthcare FSA) or dependent care costs (dependent care FSA). Contributions reduce taxable income, saving taxes at the employee's marginal rate. Healthcare FSA funds cover deductibles, copayments, prescriptions, and many over-the-counter items. The primary constraint is the use-it-or-lose-it rule: most balances must be spent by the plan year end, with only up to $640 (2024) permitted to roll over. This distinguishes FSAs from Health Savings Accounts (HSAs), which accumulate without expiration. The 2025 FSA contribution limit for healthcare is $3,300.
Example
An employee in the 22% federal tax bracket contributes $2,000 to a healthcare FSA. The $2,000 is deducted from their paycheck before taxes, saving them $440 in federal income tax plus state and payroll tax savings. Over the year, they spend the $2,000 on dental work, eyeglasses, and prescription medications. The tax savings make the FSA equivalent to a 22%+ discount on those medical costs.