Finance 101
Understanding Your Flexible Savings Account
If you’re employed and your company offers benefits, open enrollment is one of the most important times of the year. This is when you get to make decisions about your healthcare coverage, retirement contributions, and other workplace benefits that will affect your finances for the next year.
One benefit that often gets overlooked is the Flexible Spending Account (FSA).
From working in Human Resources, I realized that many people don’t really understand how FSAs work or how much money they can save by using one. That’s a shame because an FSA can be one of the easiest ways to reduce your taxable income and lower your out-of-pocket healthcare costs.
If you want the short version, here it is:
An FSA allows you to set aside money from your paycheck before taxes to pay for eligible healthcare or dependent care expenses.
That means you pay less in taxes and keep more of your money.
If you want the longer explanation, keep reading.
What Is a Flexible Spending Account (FSA)?
A Flexible Spending Account is an employer-sponsored benefit that allows you to use pre-tax dollars to pay for eligible expenses.
Because your contributions are deducted before taxes, your taxable income is reduced. In simple terms, you get to pay for certain expenses using money that hasn’t been taxed yet.
There are two primary types of FSAs:
- Health Care FSA
- Dependent Care FSA
Let’s look at each one.
Health Care FSA
A Health Care FSA allows you to pay for qualified medical expenses that aren’t covered by your health insurance.
Eligible expenses may include:
- Medical copays and coinsurance
- Prescription medications
- Vision exams
- Eyeglasses and contact lenses
- Dental cleanings and procedures
- Certain over-the-counter medications and medical supplies
- Medical devices and equipment
Unfortunately, cosmetic procedures such as elective cosmetic surgery and teeth whitening generally aren’t eligible expenses.
The IRS publishes a list of qualified medical expenses in Publication 502, which is worth reviewing if you’re unsure whether an expense qualifies.
2026 Health Care FSA Contribution Limit
For 2026, employees can contribute up to $3,400 to a Health Care FSA.
Some employers also allow unused funds to carry over into the next year. For 2026 plans, employers may permit up to $680 to carry over if their plan includes a carryover provision.
Not all plans offer carryovers, however, so check your employer’s plan documents carefully.
Dependent Care FSA
A Dependent Care FSA helps employees pay for eligible childcare and dependent care expenses.
These accounts can be used for:
- Daycare
- Preschool
- Before-school and after-school care
- Summer day camps
- Babysitters while you work
- Adult daycare
- Certain eldercare expenses
To qualify, the care must generally allow you (and your spouse, if married) to work or actively look for work.
2026 Dependent Care FSA Limits
The maximum contribution remains:
- $5,000 per household for married couples filing jointly
- $2,500 if married filing separately
Unlike a Health Care FSA, Dependent Care FSA funds generally become available as contributions are made throughout the year.
How FSA Contributions Work
During open enrollment, you’ll elect how much money you’d like to contribute for the upcoming year.
Let’s say you decide to contribute $1,200 to your Health Care FSA.
If you’re paid biweekly and receive 26 paychecks per year, your employer will deduct approximately $46.15 from each paycheck.
One of the biggest advantages of a Health Care FSA is that the full annual election amount is typically available at the beginning of the plan year.
So even if you’ve only contributed $92 so far, you may still be able to submit and receive reimbursement for a $500 eligible medical expense.
That’s a pretty nice benefit.
The “Use It or Lose It” Rule
This is where many people get nervous about FSAs.
Traditionally, unused FSA funds were forfeited at the end of the plan year.
Today, many employers offer one of two options:
- A grace period to use remaining funds
- A carryover option allowing up to $680 to roll into the next year
Your employer cannot generally offer both.
Because every plan is different, make sure you understand your company’s rules before deciding how much to contribute.
My advice?
Be realistic.
It’s better to contribute an amount you’re reasonably certain you’ll use than to aggressively fund the account and risk losing money.
When Can You Change Your FSA Election?
In most cases, your election cannot be changed after open enrollment ends.
However, the IRS allows changes when you experience a qualifying life event, such as:
- Marriage
- Divorce
- Birth or adoption of a child
- Death of a dependent
- A change in employment status
- A change in health coverage
If one of these events occurs, contact your HR department as soon as possible.
FSA vs. HSA: What’s the Difference?
This is one of the most common questions people ask during open enrollment.
| FSA | HSA |
|---|---|
| Offered through employers | Requires an eligible High Deductible Health Plan (HDHP) |
| Generally use-it-or-lose-it | Funds roll over indefinitely |
| Employer owns the plan | Employee owns the account |
| Annual election made during enrollment | Contributions can be adjusted during the year |
| Limited portability | Goes with you if you change jobs |
HSAs have become increasingly popular because unused funds stay with you forever and can even be invested.
That said, an FSA can still be a fantastic option if your employer offers one and you have predictable healthcare expenses.
How Much Can an FSA Save You?
The biggest benefit is tax savings.
Let’s say you’re in a combined federal and state tax bracket of approximately 25%.
If you contribute $2,000 to your FSA, you could potentially save about $500 in taxes.
That’s real money staying in your pocket.
And if you know you’ll have medical expenses anyway, using pre-tax dollars is simply a smarter way to pay for them.
Is an FSA Right for You?
An FSA may be a good fit if you:
- Have predictable medical expenses
- Wear glasses or contact lenses
- Expect dental work during the year
- Have ongoing prescriptions
- Use daycare or dependent care services
- Want to lower your taxable income
On the other hand, if your medical expenses vary significantly from year to year, you’ll want to be careful not to overfund the account.
Questions to Ask During Open Enrollment
Before enrolling in an FSA, ask:
- What expenses are eligible?
- Does the plan offer a carryover or grace period?
- What happens to unused funds?
- Can I access my entire annual election immediately?
- What documentation is required for reimbursement?
- How does the FSA coordinate with my health insurance plan?
Final Thoughts
FSAs aren’t as exciting as getting a raise, but they can help you keep more of the money you already earn.
If you know you’ll have medical or dependent care expenses next year, an FSA can be a simple way to reduce your taxes and make those expenses a little easier to manage.
Open enrollment only comes around once a year, so take a few minutes to review your options and determine whether an FSA makes sense for your situation.
A little planning today could save you hundreds of dollars over the next year.
