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

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

A HCFSA is part of an employer benefit plan. If it’s offered, you’ll usually set it up during your company’s annual open enrollment for the upcoming plan year. Once you sign up, your employer deducts the amount you choose from your paycheck, and the money accumulates in a dedicated account. You can file a claim and be reimbursed as you pay out-of-pocket medical expenses. The refund is tax-free as long as the cost is FSA-eligible.

To be eligible for a 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).

Contribute to your FSA with pre-tax income, money that hasn’t been hit 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—neither count them toward your income.

You can contribute up to $3,300 to your FSA by 2025 – an increase of $100 from 2024. If your spouse has an FSA, you can each report the maximum for your FSAs, totaling $6,600 for your family. The annual contribution limit only applies to payroll deductions, so employer contributions do not impact your annual limit.

The IRS has rules about how and when to use your FSA funds, but it’s also worth checking the details in your employer’s plan.

You, your spouse and dependents can generally use FSA funds for medical and dental expenses that are not covered by your health plan. An FSA-approved cost is for treating or preventing a physical or mental condition – not for general care such as vitamins or spa treatments. Eligible expenses may include:

• Medical, dental and vision expenses that are not covered by your health insurance plan, such as doctor’s office co-payments, coinsurance and deductibles.

• Prescription drugs and over-the-counter medicines.

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

Everyday items used regardless of a medical condition are generally not eligible for FSA. This includes items such as floss, vitamins and cosmetics. You cannot use FSA money for health insurance premiums or long-term care.

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

You may also receive a debit card linked to your FSA that you can use to pay medical expenses directly. In this way, you do not have to face the costs and wait to be reimbursed.

You lose any unused funds at the end of the calendar year, unless your employer allows an FSA grace period or a carryover.

• Grace period: Your employer may allow you to use last year’s funds for qualified expenses accrued that year for up to 2 ½ months in the following year.

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

Because an FSA is a benefit for employees, you will also lose your FSA balance if you leave the company.

You may have other ways to save depending on the employer’s benefits. Here are additional tax accounts to consider.

• FSA employee care: Save pre-tax money to cover eligible childcare and other dependent care expenses while you work. This may 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 reserved for eligible medical expenses. Unlike an FSA, you don’t need an employer to participate, and you can let your savings sit as long as you want, investing them to grow tax-free to use in retirement.

Read more: HSAs – A retirement plan for your health

Money in an FSA account does not roll over. You will lose any money left in your account at the end of the plan year, unless your employer offers a grace period or carryover. With a grace period, you can access your FSA funds for up to 2 ½ months into the new year. If your employer offers a carrier, you can carry back up to $640 of your balance from 2024 to 2025.

You are eligible for a health care FSA if your employer offers one. Generally, you cannot have a health care FSA and an HSA. If you are a highly compensated employee, you will have additional rules.

What is the difference between an HSA and FSA?

HSAs and FSAs create pre-tax savings for eligible health care expenses. You usually cannot participate in both. FSAs are only offered through an employer, and you generally have to use the money before the end of the year. HSA funds are yours, regardless of where you work. You can use the money for current year medical costs or invest it to grow over time and withdraw it – tax-free – to pay for medical care after age 65.

What is the difference between an 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 by you. They can be carried over from one year to another, but you will lose them if you leave your job.