An FSA is a working account that you get from your employer. It saves you before taxes to use for medical costs. It looks more like an expenditure account than a savings account, however: generally, you should use the money you contribute in a year or you lose it.
How does it work?
At the beginning of the year, you decide how much money you want to put in your FSA. Your employer withdraws this amount from your pay check before taxes on your income. You can use the money in your FSA to pay qualified medical costs throughout the year. Employers can also contribute to FSA, but they are not required to do so.
The big advantage of an FSA is that you do not pay for federal, state or social security taxes on the money you contribute and spend medical purposes. FSA can also be used in parallel with any type of employers’ health plan.
A drawback is that you cannot invest or earn interest in FSA funds. In addition, if you do not use all the money you place or if you leave your job before spending it, you will probably lose it.
Why can FSA funds be used?
FSA funds can be used for qualified medical costs, including the following:
- Doctor visits, stays at the hospital and Copays
- Franchises and Cossurance
- Medical drugs and supplies
- Glasses and eye exams
- Dental work
- Mental health services
You cannot use an FSA money to pay for insurance premiums, which are the payments you make every month to maintain your active insurance policy. You may not be able to use FSA money for expenses such as cosmetic procedures, supplements and subscriptions to the gymnasium.
What is the maximum that you can contribute to an FSA?
The amount of money you can invest in an FSA is capped. In 2025, the limit is $ 3,300, but your employer can set a lower limit. If your spouse is offered an FSA, it can also contribute up to $ 3,300. The FSA household ceiling for 2025 is $ 6,600.
Even if you do not place money in your FSA, your employer can still contribute up to $ 500. However, the employer’s before tax contributions greater than $ 500 are limited to a Dollar Dollar match. This means that you will have to contribute $ 1,000 to make your employer authorized to debit in the same amount.
What happens to unused funds?
As a rule, the FSAs have a policy of use or loss, so all the money that remains at the end of the calendar year has disappeared. This is why it is important that you only contribute to an amount that you think you are spending.
However, there are exceptions. Some employers offer periods of grace up to two and a half months to use money in the account. Others allow employees to resume part of unused money. The Internal Revenue Service (IRS) determines the maximum amount which can be postponed each year. Up to $ 660 can be transported from 2025 to 2026.
Who is a better FSA for?
An FSA could be a good option if you meet one of these conditions:
- Have an employer who offers this advantage
- Want to save before tax income
- Can somewhat predict what your health costs will be
- Have regular income
- Can plan in advance
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