What is an FSA? Flexible Spending Account Explained

Last Updated on November 10, 2026 by VantagePoint

There are several different tax-favored health plans available in the US. Your employer may choose to offer one as part of your employee health benefits, but exactly which plan will vary for each company. An FSA is a Flexible Spending Arrangement or Flexible Spending Account, which allows employees to be reimbursed for qualified medical expenses.

A flexible spending account (FSA), also called a flexible spending arrangement, is an employer-established benefit that allows employees to set aside pre-tax money for eligible healthcare expenses.

FSA contributions are generally not subject to federal income or employment taxes, and reimbursements for qualified medical expenses are generally tax-free. This can reduce the effective cost of deductibles, copays, prescriptions, dental care, vision care, and other eligible expenses.

FSA at a Glance

A health FSA:

• Is offered through an employer
• Is usually funded through pre-tax payroll deductions
• May also receive employer contributions
• Can reimburse eligible medical, dental, and vision expenses
• Makes the full annual employee election generally available at the beginning of the coverage period
• Usually requires a new contribution election each plan year
• May offer a carryover or grace period, depending on the employer’s plan
• Is generally not portable when employment ends

How Does an FSA Work?

Employees usually elect an annual FSA contribution amount during open enrollment. That amount is divided across the employee’s pay periods and deducted from pay before applicable federal income and employment taxes are calculated.

For example, an employee who elects to contribute $1,200 and receives 24 paychecks would generally contribute $50 from each paycheck.

One important feature of a health FSA is that the full annual election is generally available for eligible reimbursement at the beginning of the coverage period, even though the employee has not yet contributed the entire amount through payroll.

If an employee elects $1,200 and incurs a $1,000 eligible expense early in the plan year, the employee can generally request reimbursement for the full $1,000, subject to the plan’s rules.

Employees normally cannot change a health FSA election during the plan year unless the plan permits a change following an applicable qualifying event or another permitted election change.

What Are the FSA Contribution Limits?

The IRS adjusts the health FSA employee salary-reduction limit periodically. An employer may establish a lower limit for its plan.

For plan years beginning in 2027:

The $3,500 limit applies to employee salary-reduction contributions to a health FSA. Employer contribution rules are separate and may depend on the structure of the plan.

The dependent care amount applies to a different type of benefit and cannot be combined with a health FSA to pay medical expenses.

Because limits can change, employees and employers should review current IRS guidance and the specific plan documents each year.

What Expenses Are Eligible for FSA Reimbursement?

A health FSA can generally reimburse qualified medical expenses incurred by:

• The employee
• The employee’s spouse
• Eligible dependents
• A child who has not reached age 27 by the end of the applicable tax year, subject to IRS rules

Exact coverage depends on the employer’s plan, but commonly eligible expenses include:

• Medical plan deductibles
• Copays and coinsurance
• Prescription medications
• Over-the-counter medicines
• Menstrual care products
• Dental exams and treatment
• Orthodontia
• Eye exams
• Prescription glasses and contact lenses
• Hearing aids
• Medical equipment and supplies
• Diagnostic devices
• Mental health treatment
• Physical therapy
• Certain transportation costs related to eligible medical care

Over-the-counter medicines no longer require a prescription to qualify for FSA reimbursement under current federal rules. However, the expense must still qualify as medical care, and documentation may be required.

What Expenses Are Not FSA-Eligible?

A health FSA generally cannot reimburse:

• Health insurance premiums
• Long-term care premiums or services
• Expenses already reimbursed by another plan
• Cosmetic procedures that are not medically necessary
• General fitness or wellness expenses
• Gym memberships for general health
• Toiletries and personal-use items
• Vitamins or nutritional supplements used only for general health
• Childcare or dependent care expenses
• Expenses incurred outside the employee’s period of FSA coverage

Some expenses may qualify only when they treat or alleviate a diagnosed medical condition and are supported by appropriate documentation.

Employees should review their plan’s eligible-expense list or contact the FSA administrator before assuming that an expense will be reimbursed.

What Types of FSAs Are Available?

Although the term “FSA” is frequently used to describe a healthcare account, employers may offer several different arrangements.

Health FSA

A general-purpose health FSA can reimburse a broad range of eligible medical, dental, and vision expenses.

Because it provides first-dollar medical coverage, participation in a general-purpose health FSA generally makes an individual ineligible to contribute to a Health Savings Account.

Limited-Purpose FSA

A limited-purpose FSA is typically designed for employees who contribute to an HSA. Before the applicable deductible is met, it generally reimburses eligible dental and vision expenses rather than general medical expenses.

Specific coverage depends on the plan.

Post-Deductible FSA

A post-deductible FSA generally begins reimbursing certain medical expenses only after the participant has met the applicable minimum deductible.

This type of arrangement may be compatible with HSA contributions when it satisfies applicable requirements.

Dependent Care FSA

A dependent care FSA is not a healthcare account. It can reimburse eligible care expenses that allow an employee and, if applicable, the employee’s spouse to work or look for work.

Eligible expenses may include:

• Daycare
• Preschool
• Before- and after-school care
• Summer day camp
• Adult daycare
• Care for a qualifying spouse or dependent who cannot care for themselves

A dependent care FSA cannot reimburse a dependent’s medical expenses. Those expenses may instead qualify under a health FSA.

What Is the FSA “Use-It-or-Lose-It” Rule?

Health FSAs are generally subject to the “use-it-or-lose-it” rule. This means unused funds may be forfeited after the applicable deadlines.

However, an employer may design its health FSA to offer one of the following:

Carryover

For plan years beginning in 2027, an employer may allow participants to carry over up to $700 in unused health FSA funds into the following plan year.

The employer can establish a lower carryover amount and is not required to offer a carryover.

Grace Period

Instead of a carryover, an employer may provide a grace period of up to two and a half months after the plan year ends. Eligible expenses incurred during the grace period may be reimbursed from the previous plan year’s remaining balance.

A health FSA generally cannot offer both a carryover and a grace period.

Run-Out Period

A run-out period is different from a grace period. It provides additional time to submit claims for eligible expenses that were incurred during the coverage period.

A run-out period does not extend the period during which new expenses can be incurred.

Employees should check all three dates:

• The final date to incur eligible expenses
• The final date to submit claims
• The date on which unused funds are forfeited

How Do FSA Reimbursements Work?

Depending on the plan, participants may use one of two common reimbursement methods.

FSA Debit Card

Some plans provide an FSA debit card that can be used with eligible healthcare providers and merchants.

Even when a card transaction is approved, the administrator may request a receipt, itemized statement, or Explanation of Benefits to substantiate the expense. Participants should keep their documentation.

Reimbursement Claim

Participants may pay an expense out of pocket and submit a claim to the FSA administrator. The claim generally includes:

• The date the expense was incurred
• The name of the provider or merchant
• A description of the service or product
• The amount paid
• Confirmation that the expense was not reimbursed elsewhere

An FSA reimburses expenses incurred during the participant’s coverage period. It generally cannot reimburse projected or future expenses before they are incurred.

FSA vs. HSA: What Is the Difference?

Both FSAs and HSAs can help pay qualified healthcare expenses with tax-advantaged funds, but they operate differently.

Employees who have access to both an FSA and an HSA option should confirm eligibility before making an election. Coverage under a spouse’s general-purpose health FSA may also affect HSA eligibility in some circumstances.

How Much Should You Contribute to an FSA?

Estimate predictable eligible expenses for the coming year, including:

• Regular prescriptions
• Copays
• Planned dental treatment
• Prescription glasses or contact lenses
• Therapy appointments
• Medical equipment
• Expected deductibles and coinsurance

Then review:

• The employer’s FSA limit
• Whether the plan offers a carryover or grace period
• The claims submission deadline
• Any expected changes in family coverage
• Whether another account or plan will reimburse the same expenses

Avoid contributing more than you can reasonably expect to use because unused funds may be forfeited.

Employees can also review VantagePoint’s guide on how to choose a health insurance plan during open enrollment before finalizing their benefit elections.

What Happens to an FSA When Employment Ends?

When employment or FSA eligibility ends, participants can generally submit claims during the plan’s run-out period for eligible expenses incurred while they were covered.

Expenses incurred after FSA coverage ends generally are not eligible unless coverage is continued under an applicable continuation arrangement.

COBRA continuation may be available for a health FSA in certain circumstances. Eligibility, cost, and the value of continuing coverage depend on the plan and the participant’s remaining balance. Review the plan documents and COBRA election notice before making a decision.

Employers can also review VantagePoint’s guide to COBRA deadlines and the 44/60/45 rule.

Frequently Asked Questions About FSAs

What does FSA stand for?

FSA commonly stands for Flexible Spending Account, although the term used in federal tax guidance is Flexible Spending Arrangement. It is an employer-established benefit used to reimburse eligible expenses with tax-advantaged funds.

Who is eligible for an FSA?

An employee can participate when an employer offers an FSA and the employee meets the plan’s eligibility requirements. A health FSA is generally not available as an individual account outside employment.

Can I use an FSA for over-the-counter medicine?

Yes. Current federal rules allow health FSA reimbursement for eligible over-the-counter medicines without a prescription. Menstrual care products may also qualify.

Can I use an FSA to pay health insurance premiums?

No. Health insurance premiums generally cannot be reimbursed through a health FSA.

Can an FSA pay for dental and vision expenses?

Yes. Health FSAs commonly reimburse eligible dental and vision expenses, including exams, treatment, prescription glasses, contact lenses, and certain dental procedures.

Does FSA money roll over?

It depends on the employer’s plan. A health FSA may offer a carryover or a grace period, but the employer is not required to offer either.

Can I have both an FSA and an HSA?

A general-purpose health FSA generally makes an individual ineligible to contribute to an HSA. A limited-purpose or qualifying post-deductible FSA may be compatible with an HSA.

Can I use my FSA for my spouse or dependents?

A health FSA can generally reimburse eligible expenses for the employee, spouse, qualifying dependents, and certain children under age 27, subject to applicable tax and plan rules.

Do I need to re-enroll in an FSA every year?

Health FSA contribution elections generally do not automatically renew. Employees commonly need to make a new election during each open enrollment period. Review the employer’s instructions because plan procedures can vary.

Make the Most of Your Flexible Spending Account

A health FSA can reduce the effective cost of eligible healthcare expenses, but employees need to understand contribution limits, reimbursement requirements, deadlines, and forfeiture rules.

Employers can improve participation and reduce confusion by clearly communicating eligible expenses, carryover or grace-period provisions, claims deadlines, and how the FSA interacts with other health benefits.

For help with FSA administration, employee education, or benefits enrollment, contact VantagePoint or call (516) 599-2120.

This article provides general educational information and does not constitute legal, tax, medical, or financial advice. Plan terms and individual circumstances vary.

Call us. We are here to help.

Monday – Friday: 8:30 am – 5:30 pm (516) 599-2120 or Info@VantagePointBenefit.com

Official Resources

• IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans
• IRS: 2027 Health FSA Contribution and Carryover Limits
• IRS Publication 502: Medical and Dental Expenses
• IRS: Medical Expenses Related to Nutrition, Wellness, and General Health
• HealthCare.gov: Using a Flexible Spending Account