What Is a Flexible Spending Account and Its Benefits

A Flexible Spending Account (FSA) is a type of savings account that allows you to set aside pre-tax dollars for medical expenses or childcare costs.

You can contribute up to a certain amount each year, and the funds are used tax-free for eligible expenses.

With an FSA, you can save money on your taxes and also reduce your out-of-pocket expenses for medical care and childcare.

The contributions you make to an FSA are made with pre-tax dollars, which means you won't have to pay federal income tax on the money.

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A Flexible Spending Account, or FSA, is a way to save money on taxes by setting aside pre-tax dollars for out-of-pocket health care and dependent care expenses. Contributions are subtracted from your paycheck before taxes are calculated.

You can use your FSA to pay for expenses like medical, vision, and dental care for yourself and your eligible dependents. This can include things like copays, prescriptions, and glasses.

There are three types of FSAs offered by U-M: Health Care FSA, Limited Purpose FSA, and Dependent Care FSA. You can enroll in one type or both, and contribute tax-free dollars to your FSA(s) through payroll deductions.

Here are the three types of FSAs offered by U-M:

You can claim amounts equal to your entire annual health care contribution from your Health Care Flexible Spending Account at any time during the year.

There are three main types of FSAs: healthcare FSAs, limited-purpose FSAs, and dependent care FSAs. Each type meets a different need and has its own unique qualities and benefits.

A healthcare FSA is a general-purpose FSA that can be used for a wide range of qualified medical expenses. Contribution limits for a healthcare FSA are not specified, but other types of FSAs have specific limits.

Limited-purpose FSAs are similar to standard FSAs, but they can only be used for qualified dental, vision, and preventive care expenses. For 2025, the contribution limit for an LP-FSA is $3,300.

Dependent care FSAs are designed to help cover expenses related to caring for a dependent, such as a child or elderly parent. Some employers may offer FSAs that suit specific needs, but these details can differ depending on the type of FSA you have.

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There are three types of FSAs: healthcare FSA, limited-purpose FSA, and dependent care FSA. Each meets a different need and has its own unique qualities and benefits.

A healthcare FSA is a general-purpose FSA that can be used to cover qualified medical expenses, but some employers may offer FSAs that suit specific needs. Contribution limits and plan details can differ depending on the type of FSA.

For 2025, the contribution limit for an LP-FSA is $3,300. This type of FSA can only be used to help cover qualified dental, vision, and preventive care expenses.

You can contribute to a limited-purpose FSA while also contributing to a health savings account (HSA). This is because funds from a limited-purpose FSA are only used for out-of-pocket dental and vision expenses, allowing you to reserve more money in your HSA for retirement.

Some employers may offer FSAs for other qualified expenses, such as adoption assistance. Additionally, most cafeteria plans offer flexible spending accounts focused on medical and dependent care expenses.

Here are the types of FSAs and their corresponding contribution limits:

Note that the contribution limits for healthcare and dependent care FSAs are not specified in the article sections provided.

The Inspira Card is a convenient way to pay for eligible health care expenses. It's mailed to new enrollees in a Health Care FSA, but not to those only enrolled in a Dependent Care FSA.

You can use your Inspira Card to pay for eligible expenses, but if you're enrolled in a Health Care FSA and didn't receive a card, you should call Inspira Financial at 877-343-1346.

The plan year for your FSA ends on December 31, and you have a grace period to incur eligible expenses up to March 15 of the following year.

To avoid any issues, contribute to your FSA only the amount you're reasonably sure you'll spend annually, and file all claims for reimbursement by the deadline.

Here are some additional resources to help you manage your FSA:

A Flexible Spending Account (FSA) can be a great way to save money on taxes, but it's essential to understand its benefits and limitations. You can save up to a certain amount of money on taxes, depending on your plan.

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One of the main benefits of an FSA is that it reduces your annual taxes, potentially saving you hundreds of dollars. For example, if you deposit $1,500 into a Health Care Flexible Spending Account, your taxable income is reduced, resulting in lower federal and Social Security taxes. This can leave you with more spendable income, such as $17,053, compared to $16,518 without an FSA.

However, FSAs come with some limitations. For instance, funds typically need to be used by the end of the year, or they're forfeited. You may have a 2.5-month grace period or be able to roll over unused funds up to a certain amount, currently $660 as of 2025, depending on your plan.

Contributions to a Flexible Spending Account (FSA) aren't subject to tax, which can be a significant advantage for employees.

You can use your FSA funds to pay for everyday items, such as sunscreen, band-aids, and menstrual care products. This can be especially helpful for people with ongoing medical expenses.

Employers can also contribute to your FSA, although they aren't required to do so.

Withdrawing money from your FSA account is relatively simple, thanks to the FSA debit card or online portal.

Here are some benefits of an FSA:

Having an FSA can also offer tax advantages, as the amount you contribute is pre-taxed. This means you save whatever percentage you would have paid in federal taxes if the money had not been deducted from your paycheck.

You've got to use your FSA funds by the end of the plan year, or they're forfeited. This is known as the "Use It or Lose It" rule, which can be a challenge to keep track of.

Unused funds can be used during a 2.5 month grace period offered by some employers, or you can roll over a maximum of $660 of unused funds as of 2025, depending on your plan.

FSAs are tied to your employee benefits, so if you leave your job or are terminated, you typically won't be able to take the money in your FSA with you.

If you're self-employed or your employer doesn't offer FSAs, you won't be able to open one.

The university uses forfeited funds to pay administration costs of the FSA program, or to fund other university initiatives such as employee benefits administration costs, education and benefit election tools, and university scholarship funds.

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Over-the-counter drugs have seen significant changes in recent years. Effective January 1, 2020, over-the-counter medicines are allowable without a prescription or a note from a physician.

The CARES Act made this change, expanding the types of medical expenses that can be reimbursed through a Flexible Spending Account (FSA).

The IRS rules on what is and isn't eligible for reimbursement have proven to be rather arcane in practice. Substantiation has become an issue, requiring either manual claims or submission of receipts after the fact for OTC purchases.

The inventory information approval system (IIAS) was developed to address this issue, separating eligible and ineligible items at the point-of-sale and providing for automatic debit-card substantiation.

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Enrolling in an FSA is a straightforward process. You can download a form or complete an eForm to enroll, but be aware that IRS rules don't allow FSA enrollments to carry over from year to year.

To enroll, you'll need to decide how much money you want to allocate to your FSA at the beginning of the plan year. You can't change this amount unless your employment changes.

The amount you decide on will be automatically deducted from your paycheck and deposited into the FSA, so think carefully about your estimate. You'll either receive a debit card tied to the account or need to submit receipts to the FSA administrator to receive reimbursement.

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Enrolling in a plan is a straightforward process. To enroll in a health care FSA, you'll need to decide how much money you want to allocate to the account at the beginning of the plan year. Think carefully about this estimate, as you can't change the amount unless your employment changes.

You'll need to set up your FSA and the amount will be automatically deducted from your paycheck. You'll either receive a debit card tied to the account or need to submit receipts to the FSA administrator to receive reimbursement.

During the open enrollment period, estimate your out-of-pocket health care expenses for the plan year. This will help you decide how much of your salary you want to set aside in the FSA account.

Here are some key dates to keep in mind:

It's worth noting that you can only enroll in an FSA during the open enrollment period, and you need to re-enroll every year. You can't carry over your enrollment from year to year.

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If an employee experiences a qualifying event during the first period of the plan year, the entire amount of the annual contribution can be claimed against the FSA benefits.

The "free" money in an FSA is not taxable because the IRS views these plans as health insurance plans for tax purposes, according to IRS section 125.

Employers may have to make up the difference that the employee has spent from the flexible spending account but not yet contributed, which can be a risk for them.

If multiple employees use their entire flexible benefit before they are terminated, the company may have to reimburse the plan, which can be costly.

An employee does not continue to contribute to the plan upon termination of employment, so they can use the entire amount on day one of the plan year and still be eligible for reimbursement.

Typically, employers do not announce layoffs for specific employees with enough notice for employees to use the available benefits, and employees may actually lose their contributions in addition to being laid off.

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Unused contributions in an FSA will carryover to the next plan year for you to use. During the plan year runout period, you can still use previous year funds for previous year expenses. The IRS carryover limit for 2024 into 2025 is $640, and $660 for 2025 into 2026.

You have a 2 1/2 month grace period to incur dependent care or adoption-related expenses. This means you can use any remaining funds in your account after the plan year ends to pay for expenses incurred between January 1 to March 15 of the following year.

Your FSA's coverage period ends when the plan year ends or when your coverage under the plan ends.

Unused contributions will carryover to the next plan year for you to use. This means you can still use leftover funds from the previous year to pay for expenses incurred during the plan year runout period, which is January 1-March 31.

During this time, the new plan year election will be depleted first, then carryover funds will be accessible for reimbursement. This is a great opportunity to use up any remaining funds from the previous year.

The IRS carryover limit for 2024 into 2025 is $640, and $660 for 2025 into 2026. This is the maximum amount that can be carried over to the next plan year.

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You can use any funds remaining in your account after the plan year ends to pay for expenses incurred between January 1 to March 15 of the following year. This is known as the grace period.

Claims must be submitted by the March 31 deadline, so be sure to keep track of your expenses and submit your claims on time.

The IRS "Use It or Lose It" Rule is a critical aspect of FSA management. Forfeited funds are used to pay administration costs of the FSA program.

The university uses forfeited funds for various purposes, including employee benefits administration costs, education and benefit election tools, MHealthy coaching and health initiatives, the Emergency Hardship Program, and university scholarship funds.

To be eligible for an FSA, you need to work at a company that offers FSAs as part of their employee benefits. Generally, employees don't need to be enrolled in a health insurance plan to open an FSA.

If you have a health savings account (HSA), you likely won't be eligible for a general healthcare FSA, because they're used to pay for the same types of medical expenses. However, there are specialty FSAs — like a limited purpose FSA (LP-FSA) and dependent care FSA (DC-FSA) — that you can use in conjunction with an HSA.

An FSA's coverage period ends either at the time the plan year ends for one's plan or at the time when one's coverage under that plan ends, which can be due to a separation from the employer.

Here are some key dates to keep in mind:

An FSA can be used to pay for certain expenses to care for dependents while the legal guardian is at work, including child care for children under the age of 13 and day care for an individual of any age who is incapable of self-care.

To be eligible for an FSA, you need to work at a company that offers FSAs as part of their employee benefits.

Generally, employees don’t need to be enrolled in a health insurance plan to open an FSA.

If you have a health savings account (HSA), you likely won’t be eligible for a general healthcare FSA, because they're used to pay for the same types of medical expenses.

However, there are specialty FSAs — like a limited purpose FSA (LP-FSA) and dependent care FSA (DC-FSA) — that you can use in conjunction with an HSA.

The FSA Eligibility List includes items within eligible healthcare product categories determined by the IRS.

Health Savings Accounts share the same medical item eligibility list as FSAs.

As of January 1, 2020, prescription requirements were lifted for FSA reimbursement.

The annual contribution amount must remain the same throughout the year unless certain qualifying events occur, such as the birth of a child or death of a spouse.

Dependent care is a vital aspect of FSAs, and understanding the eligibility and coverage rules is crucial. The contribution limit for a Dependent Care FSA (DC-FSA) is $5,000 per household or $2,500 for married couples filing separately.

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To be eligible for a DC-FSA, you need to have a dependent in need of care. This can include children under the age of 13 or an adult who is physically or mentally incapable of self-care and lives with you. In-home care for a spouse or relative who requires assistance is also eligible.

The IRS allows married spouses to each elect a DC-FSA, but their combined election cannot exceed $5,000 per year. If your household has withdrawals in excess of this limit, you'll need to pay income tax on the excess.

Here are the eligible expenses for a DC-FSA:

It's worth noting that DC-FSAs can be used in conjunction with an HSA, providing even more flexibility for your dependent care needs.

The coverage period for an FSA is a specific time frame that determines when you can incur eligible expenses. It's not necessarily tied to the calendar year.

If you're employed by a company, your coverage period typically ends at the time your plan year ends, which might be different from the calendar year. For example, if your plan year ends in June, that's when your coverage period ends.

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You must incur all eligible expenses within this coverage period, or you won't be reimbursed. This means you need to plan ahead and make sure you've accounted for all your expenses before the coverage period ends.

If you lose coverage due to a separation from your employer, your coverage period ends at that time. You won't be able to continue coverage under that plan, so make sure to use up your FSA funds before you leave.

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Flexible spending accounts (FSAs) are a great way to save money on medical expenses, but what can you actually use them for? You can use FSAs to cover the costs of various medical, dental, and vision expenses, as long as they're qualified.

Acupuncture and chiropractic care are both eligible expenses, which is great news for those who use these services regularly. You can also use your FSA to cover the cost of band-aids and bandages, which is a small but essential expense.

Birth control, including prescription and over-the-counter options, is also eligible for reimbursement. This is a common expense for many people, and using an FSA can help make it more affordable.

Co-insurance and deductibles are also qualified expenses, which can help you save money on medical bills. You can use your FSA to cover these costs, making it easier to manage your healthcare expenses.

Here are some examples of qualified FSA expenses:

It's worth noting that you can also use your FSA to cover the cost of first aid kits, hospital services, immunizations, and medical testing devices. For a more complete list of eligible expenses, review IRS Publication 502 or the FSA Store eligibility list.