Here's something most people don't realize about Flexible Spending Accounts: they're one of the easiest ways to give yourself a tax-free raise. If you're paying for prescription medications, glasses, dental work, or daycare, you're already spending that money. An FSA just lets you pay for those same expenses with pre-tax dollars, which means you keep more of your paycheck. But there's a catch—the notorious use-it-or-lose-it rule—and that's where most people get nervous.
Let's break down exactly how FSAs work, what you need to know about that use-it-or-lose-it rule, and how to make the most of this valuable benefit without leaving money on the table.
What Is a Flexible Spending Account?
A Flexible Spending Account is an employer-sponsored savings account that lets you set aside pre-tax money to pay for qualified medical and dependent care expenses. The key word here is pre-tax. When you contribute to an FSA, that money comes out of your paycheck before federal income tax, Social Security tax, and Medicare tax are calculated. That can save you 30% or more depending on your tax bracket.
There are two main types of FSAs: health care FSAs and dependent care FSAs. They work similarly but have different contribution limits and eligible expenses. Health care FSAs cover medical, dental, and vision expenses. Dependent care FSAs cover childcare and elder care expenses so you can work.
For 2025, you can contribute up to $3,300 to a health care FSA. That's a $100 increase from the 2024 limit of $3,200. If you're married and both have access to FSAs through your employers, you can each contribute up to the full amount. Dependent care FSAs have a separate limit of $5,000 per household (or $2,500 if you're married filing separately).
The Use-It-or-Lose-It Rule (And How to Avoid Losing Money)
This is the part that makes people hesitate to sign up for an FSA. Traditionally, if you don't spend all the money in your FSA by the end of the plan year, you lose it. Your employer gets to keep whatever you don't use. That's why careful planning is essential.
But here's the good news: the IRS gives employers two options to help you avoid forfeiting your money. Your employer can offer either a carryover or a grace period, though they're not required to offer either, and they can't offer both.
The carryover option lets you roll over a certain amount of unused funds into the next year. For 2025, that amount is $660, up from $640 in 2024. So if you have $800 left in your FSA at the end of 2025, you can carry $660 into 2026, but you'll lose the remaining $140.
The grace period option gives you an extra 2.5 months after the plan year ends to spend your remaining balance. That means if your plan year ends December 31, you'd have until March 15 to use up those funds. During the grace period, you have full access to your entire remaining balance for new expenses.
Check with your HR department to find out which option your employer offers. This information should help you decide how much to contribute without cutting it too close.
What Expenses Are FSA-Eligible?
The list of FSA-eligible expenses is surprisingly extensive, and it got even better in 2020 when the CARES Act removed the prescription requirement for over-the-counter medications and health products. Now you can use your FSA debit card to buy cold medicine, pain relievers, allergy medications, and even face masks without getting a doctor's note first.
For health care FSAs, eligible expenses include prescription medications, doctor visit copays, dental work, orthodontia, glasses and contact lenses, hearing aids, and many medical supplies. You can also use FSA funds for things like acupuncture, chiropractic care, physical therapy, and mental health services.
Some expenses require a letter of medical necessity from your healthcare provider. These might include items like massage therapy for a specific medical condition, weight loss programs prescribed for obesity, or special foods for specific medical conditions. Your FSA administrator can tell you which expenses need documentation.
The IRS publishes the official list of eligible medical expenses in Publication 502. While your FSA provider's list will cover the most common items, Publication 502 is the authoritative source if you're unsure about a specific expense.
Dependent Care FSAs: A Separate Account for Childcare
If you're paying for daycare, preschool, or after-school care so you and your spouse can work, a dependent care FSA can deliver significant tax savings. For 2024 and 2025, the contribution limit remains at $5,000 per household ($2,500 if you're married filing separately).
Dependent care FSAs cover daycare, preschool, before and after school programs, summer day camps, and adult daycare for elderly dependents who cannot care for themselves. The care must be necessary for you to work or look for work. Overnight camps, kindergarten tuition, and long-term care services don't qualify.
One important difference between health care FSAs and dependent care FSAs: with a dependent care FSA, you can only get reimbursed after you've actually incurred and paid for the expense. With a health care FSA, your full annual contribution is available from day one of the plan year, even if you haven't contributed that much yet.
Also note that highly compensated employees (those earning $160,000 or more in 2025) may face additional restrictions on dependent care FSA contributions at some employers to meet IRS nondiscrimination requirements. Check with your benefits administrator if this might affect you.
How to Choose Your FSA Contribution Amount
The tricky part about FSAs is that you have to decide how much to contribute during open enrollment, and you generally can't change that amount mid-year unless you have a qualifying life event like marriage, divorce, birth, or adoption. So you need to estimate your expenses for the entire year upfront.
Start by reviewing your medical expenses from the past year. Look at prescription costs, copays, dental visits, and vision expenses. If you know you'll need new glasses, braces, or a planned surgery in the coming year, factor those in. For dependent care FSAs, calculate your annual daycare or eldercare costs.
Be conservative rather than aggressive with your estimate, especially if your employer doesn't offer a rollover or grace period. It's better to contribute a bit less and not quite maximize your tax savings than to contribute too much and forfeit hundreds of dollars. If your employer offers the $660 rollover, you have a nice cushion. If they offer the 2.5-month grace period, you have more time to use up your balance.
Getting Started with an FSA
FSAs are only available through employers, so you'll sign up during your company's open enrollment period. If you're just starting a new job, you can typically enroll within 30 days of your start date. Self-employed individuals cannot open FSAs, but you might consider a Health Savings Account (HSA) if you have a high-deductible health plan.
Once you're enrolled, you'll typically receive a debit card linked to your FSA. You can use this card at pharmacies, doctor's offices, and many retailers that sell eligible products. Keep your receipts—your FSA administrator may request documentation to verify that your purchases were for qualified expenses.
Many FSA providers have online portals and mobile apps where you can check your balance, submit receipts, and request reimbursements if you paid out of pocket. Take advantage of these tools to track your spending throughout the year and avoid any end-of-year scramble.
The bottom line: FSAs are a powerful tax-saving tool if you use them thoughtfully. Do the math on your predictable medical and dependent care expenses, check whether your employer offers a rollover or grace period, and contribute conservatively to avoid forfeiting funds. When used wisely, an FSA puts more money back in your pocket every year without changing how much you spend on healthcare.
