FSA (Flexible Spending Account)
An employer-sponsored account that lets you set aside pre-tax dollars for medical expenses or dependent care. Unlike HSAs, FSAs generally have a use-it-or-lose-it rule.
A Flexible Spending Account (FSA) is an employer-provided benefit that allows you to contribute pre-tax dollars to pay for eligible medical expenses (Healthcare FSA) or dependent care costs (Dependent Care FSA). Contributions reduce your taxable income and are not subject to FICA taxes, saving you both income tax and payroll tax.
For 2025, the Healthcare FSA contribution limit is $3,300. The Dependent Care FSA limit is $5,000 per household ($2,500 if married filing separately). These limits are set during your employer's open enrollment and cannot generally be changed mid-year unless you have a qualifying life event.
The main drawback of an FSA is the use-it-or-lose-it rule: unspent funds at the end of the plan year are forfeited. However, employers may offer either a grace period of up to 2.5 extra months to spend remaining funds, or a carryover of up to $660 (in 2025) to the next year, but not both. You cannot have both an HSA and a general-purpose Healthcare FSA simultaneously, though Limited Purpose FSAs for dental and vision are allowed.
Related Terms
HSA (Health Savings Account)
A triple-tax-advantaged savings account for medical expenses, available with high-deductible health plans. Contributions are tax-deductible, growth is tax-free, and qualified withdrawals are tax-free.
Above-the-Line Deduction
Deductions subtracted from gross income to arrive at AGI, available regardless of whether you itemize. Examples include IRA contributions, student loan interest, and HSA contributions.
FICA
Federal Insurance Contributions Act taxes that fund Social Security (6.2%) and Medicare (1.45%). Both employees and employers pay FICA, totaling 15.3% on wages.