How FSAs Work and What They Cover [2021]

An in-depth look at how FSAs work, what the funds can be used for, and why these accounts are great for reducing your taxable expenses each year.
Last updated May 13, 2021 | By Stephanie Colestock
Flexible spending accounts

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Depending on where you work, your employer may offer a variety of perks, such as health insurance, paid vacations, and a robust retirement plan. One benefit that you may also encounter is the flexible spending account, or FSA.

An FSA allows you to pay for eligible medical and health care expenses throughout the year, using pre-tax dollars. These accounts could also include contributions from your employer, making them even more valuable.

Let’s take a look at what FSAs are and how they differ from other employer-sponsored accounts.

In this article

How does a flex spending account work?

An FSA is a specific-use account offered through an employer, which allows the account holder to use tax-free dollars toward eligible health, medical, or other care expenses. Typically, FSAs are funded via payroll deductions; employers also have the option to contribute to their employees’ FSAs, though they are not required to do so.

One of the great benefits of FSAs is that they are tax-advantaged accounts. Because they are funded with pre-tax dollars, and there are no taxes imposed on the accumulated funds, they could provide significant savings on eligible purchases throughout the year, relative to the account holder’s tax bracket. They also offer one more way to reduce one’s gross income for the year.

Plus, with (possible) employer contributions and scheduled payroll deductions funding the account, an FSA could help you offset the cost of eligible health- or medical-related costs.

So exactly how does a flex spending account work and what does it cover? That depends partly on what type of FSA you have in the first place.

Types of FSAs

There is more than one type of FSA to consider, depending on your and your family’s needs and what’s offered by your employer.

There are three primary types of FSAs: health care FSAs, dependent care FSAs, and limited-purpose FSAs. Additionally, some companies may choose to offer their employees access to specialized fringe benefit accounts, such as adoption assistance FSAs and commuter transit accounts (sometimes referred to as commuter FSAs).

Let’s take a look at each of these FSA types, what they cover, and how they might be used.

Health care FSA (HCFSA)

Perhaps the most often utilized FSA plan is the health care FSA, or HCFSA. As with other FSAs, this account could be funded by your payroll contributions, employer contributions, or both. Up to $2,750 can be contributed to this account for 2021, though employers can also set their own (lower) limits, so keep that in mind.

Health FSA contributions can be used to pay for a wide range of eligible health care expenses, supplies, copays, and treatments. Here’s a short list of qualified medical expenses:

  • Doctor’s visits and insurance copays
  • Certain surgeries
  • Prescription drugs and over-the-counter medications
  • First aid supplies
  • Acupuncture
  • Massage therapy
  • Contact lenses, eyeglasses, and eye drops
  • Sunscreen
  • Thermometers
  • Certain birth control, family planning, feminine care, and prenatal supplies
  • Diaper rash creams and ointments
  • Pain relievers, allergy medications, and sleep aids

This is not a comprehensive list, though, and there are many other eligible expenses you might use your health care FSA dollars on each year.

Dependent care (DCFSA)

A dependent care FSA (DCFSA) makes it simple and more affordable to pay for eligible dependent care expenses, by using a dedicated employer account and pre-tax dollars.

Funds held in a DCFSA might be used to pay for things like:

  • Day care and preschool
  • Summer day camps
  • Before- and after-school programs
  • Babysitting and nanny expenses

In order for an expense to fall under the DCFSA umbrella, it needs to involve eligible child care for a child under 13 years old or care for a spouse, child, or other relative who lives in your home and is physically or mentally incapable of caring for themself.

As with health care FSAs, DCFSAs are currently limited to contributions of $2,750 for 2021.

Limited purpose (LPFSA)

A limited purpose FSA, or LPFSA, is — as the name implies — an FSA with a very narrow scope of spending eligibility. It’s intended to cover only certain dental and vision expenses, in fact.

It’s also the only type of FSA that can be used in conjunction with a health savings account. You cannot contribute to an HSA and a DCFSA or HCFSA at the same time.

With LPFSA funds, you are able to use pre-tax dollars to pay for eligible purchases, copays, treatments, and equipment involving your dental care and vision. This includes, but is not limited to:

  • Routine and cosmetic dental procedures (cleanings, x-rays, fillings, root canals, crowns, implants, and more)
  • Braces, mouth guards, dentures, denture care supplies
  • Contact lenses, cleaning solution, prescription glasses, glasses repair kits
  • Vision exams
  • Corrective surgery (LASIK, etc.)
  • Braille books and magazines
  • Seeing eye dogs

Elective cosmetic surgeries, teeth bleaching, toothpaste/mouthwash, and eye serums/wrinkle creams are excluded, however.

Pros of FSAs

There are a slew of benefits to FSAs, even if you don’t think you have many health- or care-related expenses throughout the year. If one is offered to you by your employer (especially if the company is willing to contribute to the account), it’s definitely worth doing the math and considering whether you want to contribute.

Many expenses are eligible for reimbursement

There is a broad range of eligible expenses that FSA funds may cover. Depending on which FSA you hold, these expenses might include medical, dental, vision, or health-related purchases or payments for you, your spouse, and your dependents.

FSA funds cover common expenses (think insurance deductibles and copays, dental cleanings, and prescription meds) as well as less obvious purchases (sunscreen, diaper rash ointment, and summer day camp). If you have questions about whether something is considered an eligible expense, it’s best to check with your plan administrator to confirm.

You don’t need a high-deductible health care plan

Currently, HSAs are offered only to those enrolled in high-deductible health care plans. FSAs, however, have no such requirement.

As long as your employer offers an FSA, you are likely eligible to enroll. Just note that unlike an HSA, your FSA funds will not go with you if you leave the company. That’s why it can make sense to save for health and medical expenses using more than one tax-advantaged vehicle, if possible.

Contributions are tax-advantaged

Your FSA will be funded with pre-tax dollars through payroll deduction. This not only helps reduce your overall tax burden for the year, but also lowers your taxable income (potentially saving you even more in income taxes).

Employers also have the option to contribute to your FSA, on your behalf. However, they are not required to do so.

Cons of FSAs

As helpful as they are, though, FSAs aren’t right for everyone.

Use ‘em or lose ‘em

Unfortunately, the money in your FSA account has an expiration date: the end of the year. Beyond that date, your contributions — if not used for eligible expenses — are simply lost.

The caveat is that your employer can choose to either allow for some of those funds (up to $550) to roll over to the following year. If you have $400 in an FSA and your employer allows for a rollover, no funds will be lost. If you have $750 in the account, you’ll lose $200 but be able to roll the remaining $550 into the next plan year.

Employers might also offer a grace period during which you can continue spending last year’s funds into the following year. The grace period is a total of two months and 15 days in length, ending on March 15. Employers can offer only one of these two options to employees: a grace period or an FSA funds rollover.

Expenses need to qualify

Unlike a basic savings account, you can use FSA funds only on eligible procedures, products, treatments, and services, according to the type of FSA you have. If you simply don’t have enough expenses in a given year, you may lose the remaining funds or be forced to find ways to spend the money in time.

FSA funds do not earn interest or grow over time

What you (and your employer) contribute to your FSA is what you get. Unlike a basic savings account or even a retirement account, the funds in your FSA will neither accrue interest over the course of the year nor earn dividends or otherwise grow.

You can’t contribute as much to an FSA as you can to an HSA

There are many similarities between an HSA and an FSA, but you cannot contribute to both at the same time (unless you opt for a limited-purpose FSA). If you are struggling to decide which account is best — and have more than $2,750 in annual, eligible expenses — an FSA may not be the right choice.

For 2021, the maximum HSA contribution for employees and employers combined is $3,600; for a family, this limit increases to $7,200. FSAs allow employees and employers to contribute a combined $2,750.

How to contribute to an FSA

Both you and your employer are able to contribute to your FSA, up to the federal contribution limit ($2,750 for 2021) or your employer’s own limit.

Typically, you will determine how much you want to contribute to your FSA in a given year, and your employer will front-load the account for you at the beginning of the year. You will repay your employer by making regular contributions via payroll deduction.

An FSA is one type of benefit that stays with the employer. This means that if you leave a company, you won’t be able to take your FSA (or accrued funds) with you, in most cases. However, if you’re eligible for COBRA coverage after you leave your job, you might be able to extend the availability of your FSA funds, in some cases.

Even if you stay with a company, unused funds can still be lost at the end of each calendar year, if they aren’t used on eligible expenses in time. Some employers may offer a grace period if you miss the spending deadline, or allow you to roll over some of the funds from one year to the next.

This means that you should contribute only as much to an FSA as you think you’ll spend in a given year. You are limited by the IRS too. In 2021, you can only add up to $2,750 to your account, though your employer can limit you to even less.

How to withdraw money from an FSA

There are two ways to spend funds held in an FSA: paying out of pocket and applying for reimbursement, or by obtaining a connected spending card.

FSA spending cards act as debit cards, and can be used on eligible medical, health, and dependent care expenses. Just swipe at the register and immediately access the funds you need, when you need them.

If your employer doesn’t offer an FSA spending card, you can pay for eligible expenses on your own and then submit receipts for reimbursement whenever you’re ready.

FAQs about FSAs

Is an FSA the same as a health reimbursement account (HRA)?

An FSA is not the same as an HRA, or health reimbursement account (sometimes known as a health reimbursement arrangement).

Although both accounts are employer-owned and could be used to reimburse you for eligible health expenses throughout the year, there are some important differences. For instance, only employers can contribute to HRAs, whereas both employees and employers can contribute to FSAs.

Is an FSA the same as a health savings account (HSA)?

Both FSAs and HSAs can be used to pay for eligible, health-related expenses in a tax-advantaged way. There are many differences between the two — carryover funds, contribution limits, and eligible expenses, to name a few — and you are unable to contribute to both account types at the same time.

Can you use your FSA to pay for a gym membership?

An FSA could potentially be used to pay for gym memberships if you have a medical condition that requires you to exercise at a gym facility. Your doctor will need to submit a letter of medical necessity in order for this expense to be eligible.

What happens to your FSA if you quit your job?

An FSA is a benefit that stays with an employer. If you quit your job, in most cases, your FSA stays behind — along with any remaining, unused funds in that account. If you’re eligible for and elect COBRA coverage upon leaving your job, you might be able to extend the availability of your FSA funds.

Can you have an FSA with a high-deductible health plan (HDHP)?

Yes, you can have an FSA with a HDHP. However, having a HDHP makes you eligible to contribute to a health savings plan (HSA), which may offer even greater benefits.

You cannot contribute to an HSA and an FSA at the same time, unless your flexible savings plan is limited purpose (LPFSA). If you have an HDHP, consider whether it’s in your best interests to contribute to an HSA (with or without an LPFSA), or whether a general health FSA will be enough to meet your needs.

How much can you contribute to an FSA?

According to the IRS, employees and employers can contribute a combined maximum of $2,750 to an FSA in 2021. Employers can also set their own contribution limits, which may be equal to or lesser than the federal maximum.

Employers are allowed to either offer a grace period to employees (extending the eligible spending cutoff to March 15 of the following calendar year) or offer to carry over a portion of the FSA funds. This carryover is limited to a maximum of $550 for 2021.

The bottom line on FSAs

FSAs, or FSAs, are a valuable, employer-provided benefit that could help you pay for health, medical, and dependent care costs in a tax-advantaged way. A variety of services, treatments, and products qualify for the use of FSA funds, which may help you save money and potentially lower your gross income over the year.

Whether an FSA is right for you depends on many factors. It’s important to note that you cannot contribute to an FSA and an HSA at the same time, for instance, and that FSA funds are use-it-or-lose-it. However, these accounts could potentially be a worthwhile tool in your tax-savings arsenal, if managed properly.

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Author Details

Stephanie Colestock Stephanie Colestock is a credit card expert, travel rewards aficionado, and writer who enjoys teaching people how to be financially independent and confident about their money choices. If it has to do with credit, credit cards, or traveling the world on points, you'll find Stephanie writing about it. She also enjoys teaching people how to reach financial independence, regardless of obstacles in their path (such as the crippling student loan debt she once held). Stephanie graduated from Baylor University, and is currently working toward her CFP certification. Her work can be seen on sites such as Forbes, Dough Roller, and Johnny Jet, among many others.