FSA Accounts Explained: How to Maximize Your Flexible Spending Account
A Flexible Spending Account (FSA) is essentially free money from the IRS — a way to pay for healthcare and dependent care expenses with pre-tax dollars. If your employer offers one and you're not using it, you're overpaying taxes on expenses you're going to incur anyway.
The catch is that FSAs have rules that trip people up. Here's how to use them correctly and get every dollar's worth.
What Is an FSA and How Does It Work?
An FSA is an employer-sponsored account that lets you set aside pre-tax money for eligible expenses. You elect an annual contribution amount during open enrollment, your employer deducts it from your paycheck in equal installments, and you spend the funds using an FSA debit card or by submitting receipts for reimbursement.
The tax advantage is straightforward. If you're in the 22% federal tax bracket plus state taxes and FICA, contributing $2,000 to an FSA saves you approximately $400-$600 in taxes depending on your state. You're paying the same $2,000 in healthcare expenses either way — you're just paying them with pre-tax dollars.
Unlike HSAs (Health Savings Accounts), FSAs don't require a high-deductible health plan. Most employer health plans that include FSA options allow contributions regardless of the specific plan type.
Types of FSAs
There are three main FSA types, each with different rules:
Healthcare FSA (HCFSA): Covers qualified medical, dental, and vision expenses for you, your spouse, and dependents. The 2026 contribution limit is $3,300.
Dependent Care FSA (DCFSA): Covers childcare, daycare, preschool, after-school programs, and elder care expenses for qualifying dependents so you can work. The 2026 limit is $5,000 per household ($2,500 if married filing separately).
Limited Purpose FSA (LPFSA): Available if you have an HSA — this FSA covers only dental and vision expenses, keeping you HSA-eligible. If you have both an HSA and an employer that offers an FSA, an LPFSA lets you benefit from both.
What Healthcare FSAs Cover
FSA-eligible expenses are broader than most people realize. Qualified expenses include:
Medical: Doctor copays, prescriptions, medical equipment (crutches, blood pressure monitors), vision exams, eyeglasses and contact lenses, hearing aids, mental health therapy copays, physical therapy, ambulance services, and insulin.
Dental: Routine cleanings, fillings, crowns, braces, dentures, oral surgery. Not cosmetic procedures like teeth whitening.
Over-the-counter products (expanded since 2020): Pain relievers, allergy medications, cold and flu medicine, antacids, first aid supplies, sunscreen (SPF 15+ with broad spectrum), feminine hygiene products, pregnancy tests, blood glucose monitors, and more.
What's NOT covered: Cosmetic surgery, health club memberships, teeth whitening, vitamins and supplements (unless prescribed), and expenses reimbursed by insurance.
The IRS publishes a complete list of eligible expenses (Publication 502). When in doubt, check before purchasing — your FSA administrator's website usually has a searchable list.
The Use-It-or-Lose-It Rule: The Critical Catch
FSA funds are generally "use it or lose it" — any balance remaining at year-end is forfeited. This is the rule that causes people to both underfund and overfund their FSA.
However, employers can offer one of two relief options (not both):
- Grace period: 2.5 additional months (until March 15) to use prior-year funds
- Rollover: Carry over up to $660 (2026 limit, adjusted annually) into the next plan year
Your employer chooses whether to offer either option and which one. Check your plan documents or ask HR. Many plans offer nothing — strict December 31 deadline.
Healthcare FSA exception: You have access to the full annual election amount on day one. If you elect $3,000, the entire $3,000 is available January 1 even though you haven't contributed it yet. You can spend it all in January, then leave the company in February — and you keep the money (minus what was withheld from paychecks). This front-loading advantage only works in your favor.
How to Calculate the Right Contribution Amount
The goal is to contribute exactly what you'll spend on eligible expenses, with no waste.
Step 1: Review last year's spending. Look at EOBs (Explanations of Benefits) from your insurance and any out-of-pocket expenses. Add up copays, prescriptions, glasses, and dental work.
Step 2: Anticipate known expenses. Do you have scheduled dental work? Expecting a baby? Planning LASIK? Factor in procedures you know are coming.
Step 3: Add a buffer for unplanned expenses. Healthcare is unpredictable. Adding $300-$500 as a buffer for illness, minor injuries, or prescription changes is reasonable.
Step 4: Stay conservative if uncertain. If you're new to FSAs and unsure, it's better to contribute less and lose nothing than to overfund and forfeit funds. You can always increase your election next open enrollment as you get a better handle on your spending patterns.
For most single adults, $1,000-$1,800 is a reasonable starting point. For families with regular dental and vision expenses, $2,500-$3,000 makes sense.
Strategies to Maximize FSA Value
Stock up on OTC products in December. As year-end approaches with funds remaining, visit a major retailer or the FSA Store (fsastore.com) and stock up on eligible items: sunscreen, first aid supplies, pain relievers, contact lens solution, etc. These products don't expire quickly and you'll use them eventually.
Submit claims promptly. Don't let receipts pile up. Many FSA administrators have mobile apps — snap a photo and submit the same day you incur an expense.
Use your FSA card everywhere possible. Major pharmacies (CVS, Walgreens, Rite Aid), grocery chains with pharmacy sections, and warehouse clubs all accept FSA cards. The card will decline for ineligible items automatically.
Coordinate with your HSA (if you have one). If you switch from an FSA to an HSA plan mid-year, use up FSA funds first. You cannot have both an HCFSA and an HSA simultaneously.
Don't forget reimbursable dental and vision. Many people use insurance for vision exams but forget to use FSA funds for glasses, contacts, or prescription sunglasses. These can be significant expenses that FSA covers in full.
The Dependent Care FSA: Often Overlooked
The Dependent Care FSA can be even more valuable than the healthcare FSA for working parents.
If you're paying $18,000/year for daycare (not unusual in most cities), and you're in the 22% bracket, contributing the full $5,000 limit to a DCFSA saves roughly $1,100 in federal taxes alone. Unlike the healthcare FSA, you can only access DCFSA funds as they're contributed — no front-loading.
Eligible dependent care expenses include daycare centers, in-home childcare, before- and after-school programs, and summer day camps for children under 13.
Open enrollment only comes once a year. If your employer offers an FSA, it's one of the few guaranteed tax savings opportunities that requires no sophisticated planning — just a decision during enrollment season.