In the United States, a flexible spending account (FSA), also known as a flexible spending arrangement, is a type of tax-advantaged financial account first established in 1978. One significant disadvantage to using an FSA is that remaining funds in excess of a specified amount that are not used by the end of the plan year are forfeited to the employer, known as the "use it or lose it" rule. Before the 2010 Affordable Care Act, no funds could be carried over at all, while as of 2025, a plan may permit an employee to carry over up to $660 into the following year without losing the funds, but this does not apply to all plans, and some plans may have lower limits.
The most common type of flexible spending account, the medical expense FSA (also medical FSA or health FSA), is similar to a health savings account (HSA) or a health reimbursement account (HRA). However, while HSAs and HRAs are almost exclusively used as components of a consumer-driven health care plan, medical FSAs are commonly offered with more traditional health plans as well. Paper forms or an FSA debit card may be used to access the account funds.
Types Most cafeteria plans offer flexible spending accounts focused on medical and dependent care expenses, although some plans may offer accounts for other qualified expenses such as adoption assistance.
Health FSA The most common type of FSA is used to pay for medical and dental expenses not paid for by insurance, usually deductibles, copayments, and coinsurance for the employee's health plan. As of January 1, 2011, over-the-counter medications are allowed only when purchased with a doctor's prescription, except for insulin. Over-the-counter medical devices, such as bandages, crutches, and eyeglass repair kits, are allowable. Generally, allowable items are the same as those allowable for the medical tax deduction, as outlined in IRS publication 502.
Prior to the enactment of the Patient Protection and Affordable Care Act, the Internal Revenue Service permitted employers to enact any maximum annual election for their employees. Patient Protection and Affordable Care Act amended Section 125"Internal Revenue Code Section 125(i)". via Legal Information Institute, Columbia University Law School. Retrieved December 3, 2019. such that FSAs may not allow employees to choose an annual election in excess of a limit determined by the Internal Revenue Service. The annual limit was $2,500 for the first plan year beginning after December 31, 2012. The Internal Revenue Service will index subsequent plan years' limits for cost-of-living adjustments. For 2018, this adjustment increases the contribution limit to $2650. Employers have the option to limit their employees' annual elections further. This change starts in plan years that begin after December 31, 2012. The limit is applied to each employee, without regard to whether the employee has a spouse or children. Non-elective contributions made by the employer that are not deducted from the employee's wages are not counted against the limit. An employee employed by multiple unrelated employers may elect an amount up to the limit under each employer's plan. The limit does not apply to health savings accounts, health reimbursement arrangements, or the employee's share of the cost of employer-sponsored health insurance coverage.
Some employers choose to issue a debit card to their employees who participate in the FSA. Participants may use the debit card to pay for their FSA-eligible expenses at the point of sale. Pharmacies and grocery stores who choose to accept the debit card as payment must disallow transactions at point of sale if the participant attempts to pay for items that are not eligible under an FSA. In addition, employers still must require employees to provide itemized receipts for all expenses charged to the debit card. The IRS allows employers to waive this requirement when an individual uses the debit card at a pharmacy or grocery store that complies with the above procedure. The IRS also allows employers to waive this requirement when the amount charged to the debit card is a multiple of a co-pay of the employee's group health insurance plan. In most cases, the FSA administering firm will prefer actual insurance Explanations of Benefits (EOBs) clearly representing the patient portion of any medical expense, over other, more vague documentation. This requirement is becoming less cumbersome as more insurances allow patients to search for past EOBs on their websites.
Dependent care FSA FSAs can also be established to pay for certain expenses to care for certain dependents while their caretaker is at work."26 U.S. Code § 129 - Dependent care assistance programs". Legal Information Institute. Cornell University Law School.
Child care for children under the age of 13 while the guardian is at work is generally allowable under a dependent care FSA. The FSA can be used to pay for day camp for an eligible individual but not overnight camps.
Day care while a caretaker is at work is also generally allowable in the case of a spouse or dependent, regardless of age, who is physically or mentally incapable of caring for themselves, is a tax dependent, and lives with the caretaker for more than six months of the year."Child and Dependent Care Credit Flexible Benefit Plans". Internal Revenue Service. September 20, 2019. Retrieved December 2, 2019."Publication 503: Child and Dependent Care Expenses". Internal Revenue Service. 2018. Retrieved December 2, 2019.Robinson, Paige (July 23, 2021). "Caring for an Aging Parent or Spouse? Here’s How a Dependent Care FSA Can Help". Gusto.
Day care generally includes daycare centers outside the home and household employees who care for a qualifying dependent. Transportation to and from daycare provided by the care provider is often allowable with a letter of necessity.
Federal law limits the dependent care FSA to $5,000 per year per household (or $2,500 if married filing separately). The annual limit increases to $7,500 per year (or $3,750 if married filing separately) as of January 1, 2026, in accordance with the OBBBA."One Big Beautiful Bill Act (OBBBA) Signed July 4, 2025". Amwins Connect. July 11, 2025. Married spouses may each make contributions to a dependent care FSA, but their total combined annual election cannot exceed the annual limit.
Unlike medical FSAs, dependent care FSAs are not "pre-funded"; employees cannot receive reimbursement for the full amount of the annual contribution on day one. Employees can only be reimbursed up to the amount of their wages they have contributed to the dependent care FSA that far during that plan year.
If married, both spouses must earn income in order for either of them to be eligible for a dependent care FSA. The only exceptions are if the non-earning spouse is disabled or a full-time student. If one spouse earns less than the annual limit, then the benefit is limited to whatever that spouse earned."IRS Form 2441". Internal Revenue Service.
Other FSAs There are FSA plans for non-employer sponsored premium reimbursement and parking and transit expense reimbursement. The individual premium account allows an employee to pay for his or her spouse's insurance with pre-tax dollars as long as the other coverage is a non-employer-sponsored, is considered an individual plan, and is directly billed to the member or the member's spouse. A parking and transit account allows employees to pay parking or public transit expenses with pre-tax dollars up to certain limits. Though not as common as the FSAs listed above, some employers have offered adoption assistance through an FSA. Also, one cannot have a health care FSA if he or she has a High Deductible Health Plan (HDHP) with a Health Savings Account (HSA). In cases where an employee has a HDHP with a HSA, they are eligible for a Limited Expense FSA (LEX) (also called Limited Purpose FSA). These FSAs may be used to reimburse dental and vision expenses, regardless of any plan deductible; at the employer's discretion, eligible medical expenses incurred after the deductible is met may also be reimbursable.
Coverage period
An FSA's coverage period ends either at the time the plan year ends for one's plan or at the time when one's coverage under that plan ends. An example of such an event is the loss of coverage due to a separation from the employer.Revenue Service Regulation 1.125-4.
This means that if, for example, a person is employed by a company from January through June and covered on their cafeteria benefits plan (including FSA) during that time, but does not elect and pay for continued coverage under that plan (i.e., COBRA), the person's coverage period is defined only as January through June, not January through December as one might think. In this example, all covered expenses must be incurred between January and June of that year.
Plan year grace period In 2005, the Internal Revenue Service authorized an optional grace period of up to 2½ months that employers can use in their plans, allowing use of the funds for up to 2½ months after the end of the plan year.
In 2020, the Consolidated Appropriations Act, 2021 contained provisions to allow employees to roll over the remainder of their accounts from 2020 into 2021 and from 2021 into 2022.
Methods of withdrawal The FSA debit card was developed to eliminate "double-dipping", by allowing employees to access the FSA directly. It also simplified the substantiation requirement, which required labor-intensive claims processing. The debit card also enhances the effect of "pre-funding" medical FSAs. However, the substantiation requirement itself did not go away, and has even been expanded on by the IRS for the debit-card environment; therefore, withdrawal issues still remain for FSAs. These withdrawal issues have led to creative solutions by ecommerce companies who created an entire website dedicated to FSA-eligible items and accepting all FSA debit cards, and other websites which created a small portion of their website dedicated to FSAs.
According to Celent, as of May 2006, there were approximately 6 million debit cards in the market tied to FSA accounts, representing 25% of the FSA participating community. Celent projects that FSA cards will increase FSA adoption rates. The average card participation rate was around 20% as of May 2006. By 2010, it is projected this rate will increase to 85%.
Advantages and disadvantages
Pre-funding and risks incurred by the employee and employer One consideration regarding medical FSAs is that the participating employee's entire annual contribution is available at the start of the plan year, commonly January 1, or after the first contribution to the FSA is received by the FSA vendor, depending on the plan. Therefore, if the employee experiences a qualifying event during the first period, the entire amount of the annual contribution can be claimed against the FSA benefits. If the employee is terminated, quits, or is unable to return to work, he or she does not have to repay the money to the employer.
The employee contributes to the FSA in small increments throughout the year (for example, 1/26 of the annual amount if one is paid every two weeks), but taken together, all employees of a company contribute the full average amount during any given period, and no real risk is incurred by the employer. In addition, instead of paying payroll taxes to the government, the employer typically pays only a small administrative fee to the plan of $4–10 per month per participating employee. This is much less than the employer would have paid for its share of payroll taxes. In addition, any money that is not used by the end of the plan year (or grace period) is returned to the employer. This is estimated to be up to 14% of the total employee contributions, which can be a substantial boon to the employer's bottom line.