Health Care Flexible Spending Account:
Definition, Uses & Comparison

A Health Care Flexible Spending Account (FSA) is an employer-sponsored, tax-advantaged account that allows employees to set aside pre-tax dollars to pay for eligible out-of-pocket medical expenses. The money contributed to an FSA is deducted from an employee's paycheck before federal income tax, FICA tax, and in many cases state taxes are applied, resulting in significant tax savings on healthcare costs.

With a Health Care FSA, employees save an average of 30 percent on qualified medical expenses because they are using pre-tax dollars rather than after-tax income. The account is funded through regular payroll deductions, and employees can use these funds to pay for deductibles, copayments, coinsurance, prescription medications, dental and vision care, medical equipment, and many other healthcare-related expenses not fully covered by their health insurance plan.

Related terms: Healthcare FSA, HCFSA, Medical FSA, Flexible Spending Arrangement

A Health Care FSA operates through a simple enrollment and reimbursement process. During open enrollment or when starting employment, employees decide how much money to contribute to their FSA for the plan year. This elected amount is divided equally and deducted from each paycheck on a pre-tax basis, then deposited into the employee's FSA account.

The full annual contribution amount is available for use on the first day of the plan year, even though the employee has not yet contributed the entire amount through payroll deductions. When an employee incurs an eligible medical expense, they can pay using an FSA debit card at the point of service, or pay out of pocket and submit a claim with itemized receipts to receive reimbursement either by check or direct deposit.

Employers administer FSAs through third-party administrators who process claims, verify eligible expenses, and handle reimbursements. Employees can submit claims online through a member portal, via mobile app by photographing receipts, by fax, or through mail with paper claim forms and supporting documentation.

The IRS sets annual contribution limits for Health Care FSAs, which are adjusted periodically for inflation. For the 2025 plan year, the maximum contribution limit is $3,300 per employee. For the 2026 plan year, this limit increases to $3,400 per employee.

The contribution limit applies per person, which means that if both spouses in a household have access to an FSA through their respective employers, each can contribute up to the maximum limit. Employers have the option to set lower contribution limits than the IRS maximum, and some employers establish minimum contribution amounts, such as $250 or $260, to ensure meaningful participation.

Unlike contributions to the account, employers are not permitted to contribute to employee Health Care FSAs, though they may choose to do so. All FSA contributions come from employee salary reductions on a pre-tax basis, providing immediate tax savings.

Health Care FSAs can be used to pay for thousands of eligible medical expenses as defined by the IRS. Eligible expenses include medical costs such as deductibles, copayments, and coinsurance; prescription medications and insulin; over-the-counter drugs and medications; dental expenses including exams, cleanings, X-rays, fillings, braces, and orthodontia; vision care including eye exams, prescription eyeglasses, contact lenses and supplies, and laser eye surgery; hearing care such as hearing aids; chiropractic and acupuncture services; physical therapy; medical equipment like crutches, wheelchairs, and blood pressure monitors; diagnostic supplies such as blood sugar test kits and thermometers; first-aid supplies and bandages; personal protective equipment including face masks and hand sanitizer; and maternal care items like breast pumps and supplies.

The CARES Act expanded the list of FSA-eligible expenses to include over-the-counter medications without requiring a prescription, as well as menstrual care products. Expenses must be incurred during the plan year while the employee is enrolled in the FSA, and services must be performed during the coverage period to qualify for reimbursement.

Non-eligible expenses include over-the-counter dietary supplements, toiletries, cosmetics, sundry items, athletic club memberships, exercise equipment, weight reduction programs for general wellness, and insurance premiums. The IRS maintains a comprehensive list in Publication 502 detailing all qualified medical expenses.

Health Care FSAs are generally subject to the "use-it-or-lose-it" rule, which means that any funds remaining in the account at the end of the plan year are forfeited to the employer if not used for eligible expenses. However, employers may offer one of two options to help employees avoid losing their unused funds.

The first option is a grace period of up to 2.5 extra months following the end of the plan year during which employees can continue to incur and submit eligible expenses using the prior year's funds. The second option is a carryover provision, which allows employees to roll over a specified amount of unused funds into the following plan year. For funds remaining from the 2025 plan year, employees can carry over up to $660 into 2026. For funds from 2026, the carryover limit increases to $680 for the 2027 plan year.

Employers can choose to offer either the grace period or the carryover option, but not both. Some employers choose not to offer either option, requiring strict adherence to the use-it-or-lose-it rule. Additionally, after the plan year ends, employers typically provide a run-out period of 60 to 90 days during which employees can submit claims for expenses incurred during the prior plan year, though no new expenses can be incurred during this time.

Health Care FSA eligibility requires that an employee work for an employer that offers an FSA as part of their benefits package. Not all employers provide FSAs, and availability varies by organization and employment status. Typically, full-time employees are eligible, though some employers extend eligibility to part-time employees as well.

Employees can enroll in a Health Care FSA during their employer's annual open enrollment period or within a specified timeframe after starting employment as a new hire. Once enrolled, employees generally cannot change their contribution amount during the plan year unless they experience a qualifying life event such as marriage, divorce, birth or adoption of a child, change in employment status, change in spouse's employment, change in number of dependents, or significant change in health coverage.

One important eligibility restriction involves Health Savings Accounts. Employees who are enrolled in a Health Savings Account with a high deductible health plan cannot simultaneously contribute to a general-purpose Health Care FSA, as IRS rules prohibit this combination. However, these employees may be eligible for a Limited Purpose FSA, which restricts eligible expenses to dental and vision care only, allowing them to maintain both accounts.

Yes, a Health Care FSA can be paired with any type of employer-sponsored health insurance plan, including PPO plans, HMO plans, EPO plans, and high deductible health plans. This flexibility makes FSAs accessible to a wide range of employees regardless of their health plan selection.

However, there are important restrictions when it comes to Health Savings Accounts. If an employee is enrolled in an HSA-compatible high deductible health plan and actively contributing to an HSA, they cannot simultaneously contribute to a general-purpose Health Care FSA. The IRS considers this double-dipping on tax benefits and prohibits the combination.

Employees with HSAs who want to take advantage of FSA benefits can enroll in a Limited Purpose FSA instead, which restricts eligible expenses to dental and vision care only. This arrangement allows employees to maximize their tax savings by using the Limited Purpose FSA for dental and vision expenses while preserving their HSA funds for other medical expenses and long-term savings.

Health Care FSAs cannot be used with health insurance plans purchased through the Health Insurance Marketplace or individual plans purchased outside of an employer. FSAs are exclusively employer-sponsored benefits and require payroll deduction to function properly.

Employees save money with a Health Care FSA by using pre-tax dollars to pay for eligible medical expenses, which effectively reduces their taxable income. The amount saved depends on the employee's combined federal, state, and FICA tax rate. On average, employees save approximately 30 percent on healthcare costs when using FSA funds compared to paying with after-tax dollars.

For example, if an employee contributes the 2026 maximum of $3,400 to their Health Care FSA and has a combined tax rate of 30 percent, they would save $1,020 in taxes over the course of the year. This calculation assumes the employee incurs at least $3,400 in eligible medical expenses during the plan year.

The tax savings come from three sources: federal income tax, FICA tax which includes Social Security and Medicare taxes, and in most cases, state income tax. Because FSA contributions are deducted from gross pay before these taxes are calculated, employees pay less in total taxes while gaining access to funds specifically designated for healthcare expenses.

Employers also benefit from offering FSAs because they save on payroll taxes. The reduction in employee taxable wages through FSA contributions means employers pay less in FICA taxes on behalf of participating employees.

A Health Care FSA and a Dependent Care FSA are two distinct types of flexible spending accounts that serve different purposes and have different rules. A Health Care FSA is used to pay for eligible medical, dental, vision, and prescription expenses for the employee and their eligible dependents. A Dependent Care FSA is used to pay for employment-related dependent care expenses such as childcare, preschool, before and after school programs, summer day camp, and adult daycare for dependent adults who cannot care for themselves.

The contribution limits differ significantly between the two account types. For 2026, the Health Care FSA limit is $3,400 per employee, while the Dependent Care FSA limit is $7,500 per year for married couples filing jointly or single parents, and $3,750 per year per parent if married and filing separately. The IRS maintains different lists of eligible expenses for each account type, and funds from one FSA cannot be transferred to the other.

Another key difference involves fund availability. With a Health Care FSA, the full annual contribution amount is available on the first day of the plan year, allowing employees to incur large expenses early in the year even though they have not yet contributed the full amount. With a Dependent Care FSA, funds are only available as they are contributed through payroll deductions, meaning employees can only be reimbursed up to their current account balance.

Employees can enroll in both a Health Care FSA and a Dependent Care FSA simultaneously, as they serve different purposes and have separate contribution limits. This allows employees to maximize their tax savings across multiple categories of expenses.

A Limited Purpose FSA is a specialized type of flexible spending account designed specifically for employees who are enrolled in a Health Savings Account with a high deductible health plan. Because IRS rules prohibit simultaneous participation in an HSA and a general-purpose Health Care FSA, the Limited Purpose FSA provides a compliant alternative that allows employees to enjoy the benefits of both account types.

The Limited Purpose FSA restricts eligible expenses to dental and vision care only, including dental exams, cleanings, fillings, X-rays, braces, orthodontia, tooth extractions, dentures, mouth guards, vision exams, prescription eyeglasses and frames, contact lenses and solutions, and laser eye surgery such as LASIK. By limiting the scope of eligible expenses, the Limited Purpose FSA does not conflict with HSA eligibility rules.

The contribution limit for a Limited Purpose FSA is the same as a general-purpose Health Care FSA: $3,400 for 2026. The same carryover rules apply, allowing employees to roll over up to $680 of unused 2026 funds into 2027 if their employer offers this option. Some employers also offer a grace period instead of carryover.

The strategic advantage of a Limited Purpose FSA is that it allows employees to use FSA funds for predictable dental and vision expenses while preserving their HSA balance for other medical expenses and long-term savings. Since HSA funds roll over indefinitely and can be invested for retirement, using a Limited Purpose FSA for routine dental and vision care helps maximize the long-term growth potential of the HSA.

Generally, employees cannot change their Health Care FSA contribution amount during the plan year once their election has been made during open enrollment. This restriction is known as the limited election period rule and exists because FSAs are governed by Section 125 of the Internal Revenue Code, which requires that elections be made prospectively and remain in effect for the entire plan year.

However, employees may change their FSA contribution if they experience a qualifying life event, also called a qualified status change. Qualifying life events include changes in marital status such as marriage, divorce, legal separation, or annulment; changes in number of dependents such as birth, adoption, placement for adoption, or death of a dependent; changes in employment status including starting or terminating employment, beginning or ending a leave of absence, or changes between full-time and part-time status; changes in dependent eligibility such as a child aging out of dependent status; and significant changes in health coverage for the employee or their spouse.

When a qualifying life event occurs, employees typically have 30 days to request a change to their FSA election, and the change must be consistent with and on account of the qualifying event. For example, if an employee gets married, they may increase their FSA contribution to account for additional family healthcare expenses. If an employee's spouse loses their job and health coverage, the employee may increase their FSA contribution to cover higher out-of-pocket costs.

Some employers limit the number of mid-year changes allowed per employee, such as a maximum of two benefit election changes due to qualifying events per year. Employees should contact their HR department or benefits administrator to understand their specific plan rules regarding mid-year election changes.

When an employee terminates employment or otherwise loses eligibility for their employer's FSA plan, their participation in the Health Care FSA ends. Unlike Health Savings Accounts which are owned by the individual and portable between employers, FSAs are owned by the employer, and employees lose access to their FSA upon termination of employment.

Employees have until the end of the plan's run-out period, typically 60 to 90 days after termination, to submit claims for eligible expenses that were incurred while they were still employed and participating in the plan. No new expenses incurred after the termination date are eligible for reimbursement, regardless of when the claim is submitted. Any unused funds remaining in the FSA after the run-out period ends are forfeited to the employer.

In some cases, employees may have the option to continue their FSA coverage through COBRA continuation. If an employer offers COBRA for the FSA, the employee can continue making contributions and incurring eligible expenses, but they must pay the full cost of participation including both the employee and employer portions plus an administrative fee of up to 2 percent. COBRA continuation for an FSA is most beneficial when the employee has a significant remaining balance and expects to incur substantial eligible expenses during the COBRA coverage period.

Because of the risk of forfeiting unused funds upon termination, employees should carefully consider their expected employment stability and anticipated healthcare expenses when deciding how much to contribute to a Health Care FSA during open enrollment.

A Health Care FSA is often compared to 2 related benefit accounts:

Health Care FSA vs. Health Savings Account

Health Care FSA vs. Health Reimbursement Arrangement