A flexible spending account (FSA) lets you set aside part of your paycheck before taxes to cover health or dependent care costs, which lowers your taxable income and stretches those dollars further. For predictable expenses like copays, prescriptions or childcare, it’s one of the simplest tax breaks available through work.
The trade-off is in the name’s fine print: FSAs are largely use-it-or-lose-it, and the account belongs to your employer, not you. Understanding those rules is the difference between saving money and forfeiting it.
What is a flexible spending account?
An FSA is an employer-sponsored account that lets employees contribute pretax salary to pay for qualified health or dependent care expenses. Because the money comes out before federal income tax, Social Security and Medicare taxes, every dollar you contribute is worth more than a dollar of take-home pay spent on the same expense.
Here’s the math. If you’re in the 22% federal tax bracket and elect to put $2,000 into a health FSA, you save roughly $440 in federal income tax alone — before counting the payroll taxes you also avoid — compared with paying those costs out of pocket.
The two main types of FSA
Health care FSA
A health care FSA covers out-of-pocket medical, dental and vision costs. For 2026, you can contribute up to $3,400, up from $3,300 in 2025.(1) Your full annual election is available on the first day of the plan year, so you can use the entire amount early even though it’s deducted from your paychecks gradually.
Dependent care FSA
A dependent care FSA covers the cost of childcare, preschool, before- and after-school care, day camp and adult day care that lets you work. For 2026, the limit jumped to $7,500 per household ($3,750 if married filing separately), up from $5,000.(2) That increase came from the One Big Beautiful Bill Act — the first permanent raise since 1986, and it isn’t indexed to inflation. Unlike a health FSA, dependent care funds are only available as you contribute them.
How an FSA works — step-by-step
Enroll during open enrollment. FSAs are only available if your employer offers one, and you typically sign up once a year.
Elect your annual amount. Decide how much to contribute for the year; it’s deducted from your paychecks pretax in equal amounts.
Access the funds. A health FSA gives you the full election on day one. A dependent care FSA releases funds as they’re contributed.
Pay for eligible expenses. Use an FSA debit card or submit claims for reimbursement.
Spend by the deadline. Use your funds before your plan year ends to avoid forfeiting them.
The use-it-or-lose-it rule
Historically, any money left in an FSA at the end of the plan year was forfeited. The IRS now lets employers soften that in one of two ways: they can allow a carryover of up to $680 of unused health FSA funds into the next plan year, or they can offer a grace period of up to two and a half months to spend the balance.(1) Employers can offer one option or the other, but not both, and they aren’t required to offer either.
Hot tip: The account belongs to your employer
Because your employer owns the FSA, unused funds — and often the balance itself — generally stay behind if you leave your job. Plan your election with that in mind.
What can you spend FSA money on?
A health FSA covers:
Copays
Deductibles
Prescriptions
Dental and vision care
Many over-the-counter medications
First aid supplies
Medical equipment
A dependent care FSA covers daycare, preschool, after-school programs, day camp and adult day care. Insurance premiums, cosmetic procedures, gym memberships and overnight camps generally don’t qualify. The IRS details eligible expenses in Publications 502 and 503.(3)
How an FSA differs from an HSA
FSAs and health savings accounts (HSAs) both use pretax dollars for medical costs, but they work very differently. An FSA doesn’t require a high-deductible health plan, but it’s owned by your employer, is largely use-it-or-lose-it and can’t be invested. You also can’t contribute to an HSA while covered by a general-purpose FSA. If you’re weighing the two, our HSA vs. FSA guide breaks down which fits which situation.
Who is an FSA best for?
Employees with predictable costs. If you can estimate your annual medical spending, an FSA turns it into guaranteed tax savings.
Working parents. A dependent care FSA can save hundreds or thousands a year on childcare, especially at the higher 2026 limit.
People without an HDHP. If you don’t qualify for an HSA, an FSA is often the next-best pretax option — if your employer offers one.
Bottom line
An FSA is a straightforward way to save on healthcare and dependent care if your employer offers one and you plan your election carefully. Just watch the deadlines so you don’t leave money behind. If you have a high-deductible health plan, it’s worth comparing an FSA against an HSA before you decide.
Frequently asked questions
It's generally forfeited unless your employer offers relief. Employers can allow a carryover of up to $680 of unused health FSA funds into the next plan year, or a grace period of up to two and a half months to spend the balance — but not both, and neither is required.
Not with a general-purpose FSA, which blocks HSA contributions. A limited-purpose FSA for dental and vision or a dependent care FSA can be paired with an HSA.
Only if your employer offers a carryover option, and only up to $680 for 2026. Dependent care FSA funds generally don't roll over at all.
Because the account belongs to your employer, unspent funds are usually forfeited when you leave, though COBRA continuation may be an option in some cases.
Sources
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Matt Miczulski is an investments editor and market analyst at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on Yahoo Finance, CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
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