Flexible Spending Accounts (FSAs) offer unique advantages for managing health and dependent care expenses, but they operate differently from standard savings or spending accounts. Below are five essential facts about FSAs, along with common myths and clarifications to help you make the most of this benefit.
Key FSA Facts:
- Tax Advantages: A major perk of FSAs is the tax savings. Your contributions are pre-tax, lowering your taxable income and potentially saving you hundreds of dollars annually, depending on your tax bracket and contribution amount.
- Broad Coverage: Health care FSAs can be used for a wide range of eligible expenses, including vision and dental care, mental health services, medical equipment, and many over-the-counter items such as bandages, contact lens solution, and sunscreen—often without a prescription.
- Different FSA Types: The most common FSAs are Health Care FSAs for personal medical costs and Dependent Care FSAs (DCFSAs) for expenses like daycare, preschool, summer day camps, and elder care.
- Grace Periods or Carryovers: While generally “use it or lose it,” many employers offer flexibility. You might be able to carry over up to $660 of unused funds into the next year (2025 limit) or have a grace period of up to 2.5 months to spend remaining funds. Employers choose one option, not both.
- Immediate Access to Your Health Care FSA Funds: Unlike a typical savings account, your entire annual Health Care FSA election is available to you from the first day of the plan year, even though you contribute through payroll deductions over time. This immediate access doesn’t apply to DCFSAs.
5 Common FSA Myths Debunked
Myth: “All unused FSA funds are lost at year-end.”
Reality: Many FSA plans include a grace period or allow a carryover of unused funds (up to $660 in 2025), so you may not lose your money if you act within the allowed timeframe.
Myth: “FSAs and HSAs are the same.”
Reality: Both offer tax benefits for health costs, but they differ significantly. HSAs require a high-deductible health plan, can earn interest, and funds roll over indefinitely. FSAs don’t earn interest, and unused funds typically expire (unless a carryover or grace period applies).
Myth: “You must keep receipts for every FSA expense.”
Reality: While some purchases might require documentation, many FSA cards automatically recognize eligible expenses at participating merchants. However, it’s always wise to keep receipts in case your FSA administrator requests proof.
Myth: “I can change my contributions anytime.”
Reality: FSA elections can usually only be changed during open enrollment or after a qualifying life event, such as marriage, divorce, or the birth of a child.
Myth: “You can enroll in both a health care FSA and HSA.”
Reality: You cannot have both a Health Care FSA and an HSA. However, if you have an HSA, you can still enroll in a Dependent Care FSA or a Limited FSA, which specifically covers dental and vision expenses.
FSAs are valuable tools for managing health and family-related expenses while reducing your taxable income. Understanding how they work and recognizing common misconceptions can help you maximize their benefits. Check with your employer for details on contribution limits, eligible expenses, and any rollover or grace period features offered by your specific plan.
