What is a health care FSA? A way to save medical costs.

A healthcare flexible spending account, also called a flexible spending arrangement or FSA, allows you to save for medical expenses with pre-tax money. But you’ll need to understand the rules and qualifications to make it work for you.

The HCFSA is part of your employer’s benefits plan. If it’s offered, you can usually set it up during your company’s annual open enrollment for the upcoming plan year. Once you enroll, your employer deducts the amount you choose from your paycheck, and the money accumulates in a designated account. You will file a claim and will be reimbursed when you pay the medical expenses out of pocket. The reimbursement is tax deductible as long as the cost qualifies for the FSA.

To be eligible for the HCFSA, you must work for an employer that offers it. Self-employed individuals are not eligible. You are also not eligible for a health care FSA if you have a health savings account (HSA).

You contribute to your FSA through pre-tax income, money that is not affected by federal income tax or payroll taxes. This lowers your tax bill by reducing your taxable income. Your employer can also contribute to your FSA, accelerating your savings. The Internal Revenue Service (IRS) treats employer and employee contributions the same way—neither counts toward your income.

You can contribute up to $3,300 to your FSA for 2025 — an increase of $100 from 2024. If your spouse has an FSA, you can allocate the maximum to your FSA, for a total of $6,600 for your household. The annual contribution limit only applies to payroll deductions, so employer contributions do not affect your annual limit.

The IRS has rules about how and when your FSA funds are used, but it’s also a good idea to check the details in your employer’s plan.

You, your spouse, and your dependents can generally use FSA funds for medical and dental expenses not covered by your health plan. The FSA-approved charge is for the treatment or prevention of a physical or mental condition – not for general care such as vitamins or spa treatments. Eligible expenses can include:

• Medical, dental, and vision expenses that your health insurance plan does not cover, such as doctor’s office copayments, coinsurance, and deductibles.

• Prescription and over-the-counter medications.

• Additional care items that treat a medical condition, such as bandages, reading glasses, prescriptions, heating pads, and pregnancy tests.

Everyday items used regardless of medical condition are usually not eligible for FSA. This includes items such as floss, vitamins and cosmetics. You also can’t use FSA funds for health insurance or long-term care premiums.

There are two ways to use your FSA funds. You can pay out of pocket for health care costs and get reimbursement from your FSA by filing a claim.

You may also receive a debit card linked to your FSA that you can use to pay for medical expenses directly. This way, you won’t have to incur costs and wait for your money back.

Any unused funds at the end of the calendar year unless your employer allows an FSA grace period will be forfeited or carried forward.

• Grace period: Your employer can allow you to use prior year funds to cover eligible expenses accumulated that year for up to two and a half months in the following year.

• carry over: In 2025, you may be able to use up to $640 of your 2024 balance.

Since the FSA is an employee benefit, you will also lose your FSA balance if you leave the company.

You may have other ways to save depending on the benefits your employer offers. Below are additional tax-advantaged accounts to consider.

• Dependent Care FSA: Save pre-tax dollars for qualified childcare and other dependent care expenses while you work. This can include day care, before and after school programs, summer day camps, and elder care.

• Health Savings Account (HSA): If you have a high-deductible health plan (HDHP), you are eligible for an HSA. Contributions are tax deductible and are for qualified medical expenses. Unlike an FSA, you don’t need an employer to participate, and you can leave your savings as long as you like, investing them to grow tax-free for use in retirement.

Read more: HSAs – Your health care retirement plan

Funds in an FSA account are not rolled over. You will lose any money remaining in your account at the end of the plan year unless your employer offers a grace period or rollover. With a grace period, you can access your FSA funds for up to two and a half months in the new year. If your employer offers a rollover, you can roll over up to $640 of your balance from 2024 to 2025.

You are eligible for a health care FSA if your employer offers one. You generally can’t have a healthcare FSA and an HSA. If you are a highly paid employee, you will have additional rules.

What is the difference between HSA and FSA?

Both HSAs and FSAs build pre-tax savings for qualified health care expenses. You can’t usually participate in both. Financial services are provided only through your employer, and you generally must use the funds before the end of the year. Your HSA money is yours, no matter where you work. You can use the money for the current year’s medical costs or invest it to grow over time and take it out — tax-free — to pay for medical care after age 65.

What is the difference between HRA and FSA?

An HRA, or health reimbursement account, is similar to a health care HSA in that it’s money you can use for qualified medical expenses. But HRA funds are contributed by your employer, not you. It may carry over from year to year, but you’ll lose it if you leave your job.