Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax dollars for qualified medical expenses or dependent care costs. Contributions reduce the employee's taxable income, and withdrawals for eligible expenses are tax-free. Unlike an HSA, an FSA has a use-it-or-lose-it rule — funds that aren't spent by the end of the plan year (or a limited grace period) are forfeited back to the employer.

For 2024, the healthcare FSA contribution limit is $3,200 per employee. Employers may allow a grace period of up to 2.5 months after year-end, or a rollover of up to $640 to the following year, but not both. One feature that surprises people: the full annual healthcare FSA election is available to the employee on day one of the plan year, even though contributions come out of payroll over the full year. This front-loading creates a hidden subsidy — if an employee elects $2,000, spends it in January for a surgery, and then leaves the company in February, the employer absorbs the loss. The dependent care FSA operates differently — it reimburses expenses for childcare, after-school care, and elder care for a dependent who enables the employee to work. The dependent care FSA limit is $5,000 per household ($2,500 if married filing separately). FSAs can't be combined with HSAs on the healthcare side; someone enrolled in an HDHP with an HSA can only have a "limited purpose FSA" restricted to dental and vision expenses.

The takeaway: FSAs are a straightforward tax savings tool for employees with predictable medical or childcare spending, but the use-it-or-lose-it rule means they require planning. Remind employees to estimate conservatively — leftover FSA funds are gone, and there's no second chance after the deadline.