Flexible Spending Accounts: Rules, Regulations, and Uses

Flexible spending accounts, or FSAs, are special savings accounts offered through some employer benefit plans. They allow the account holder to pay for certain out-of-pocket medical and dependent care costs with tax-free money.

However, FSAs come with some rules and regulations. For instance, FSA rules cap the amount of money that can be placed in the account each year ($3,300 for 2025), and also dictate which types of expenses qualify for an FSA distribution.

Still, FSAs can be a powerful tool for covering unavoidable medical costs that could otherwise wreak havoc on your finances.

Flexible Spending Account Explained

FSAs are savings programs offered through employers — which means that self-employed people aren’t eligible. Those who are self-employed may be covered through an employed spouse’s plan, or they may choose to open a Health Savings Account (HSA), if they qualify.

FSAs are also sometimes called flexible spending arrangements, and they can cover you, your spouse, and your dependents. There are also a few sub-types of FSAs, such as dependent care FSAs (DCFSAs) and limited purpose FSAs (LPFSAs).

Recommended: Benefits of Health Savings Accounts

Flexible Spending Account Rules: An Overview

FSA contributions work similarly to employer-sponsored retirement plans like 401(k)s: a certain amount of pre-tax wages is withheld each pay period and contributed to the account.

The account holder elects how much to withhold at the beginning of the plan year — and, importantly, they may not be able to change it unless there’s a change in employment or family status. That means it’s important to think the decision through carefully.

But unlike a 401(k), the funds placed into an FSA aren’t tax-deferred — they’re actually tax-free. That means they aren’t included in the account holder’s total taxable income, nor are taxes due when distributions are made.

Recommended: Tax Credits vs. Tax Deductions: What’s the Difference?

How Much Can I Contribute to My FSA?

In 2025, account holders may contribute up to a maximum of $3,300 to their FSAs (up from $3,200 in 2024). If an account holders’ spouse is enrolled in an FSA plan, they can also contribute up to $3,300 in 2025, for a household maximum of $6,600. Employers may also place limits on the amount an employee can elect to be contributed, up to this federal cap.

Unused Funds: FSA Rollover and Reimbursement Rules

Another rule regarding FSAs is the fact that, generally speaking, unused FSA funds are forfeited.

In other words, FSAs are “use it or lose it” accounts; the money that isn’t used for qualified expenses by the end of the plan year typically can’t be rolled over into the next.

Thus, account holders may want to be cautious to avoid over-contributing to the plan and carefully estimate how much they think they’ll need to spend on out-of-pocket health expenses. Setting up a budget may help with this.

However, there are some exceptions to this rule. Depending on the employer’s policy choice, they may allow for a “grace period” or a carry-over option — one or the other, but not both, and they’re not legally required to offer either.

•   The grace period option allows account holders to use their FSA funds for an additional two and a half months after the plan year to pay for qualified medical expenses.

•   The carry-over option allows account holders to roll over a set amount of unused funds into the account for use in the next plan year. The max carry-over amount for 2025 is $660, though the employer may specify a lower dollar figure. Carry-over doesn’t affect the maximum allowable contribution for the next year’s plan.

Recommended: How to Negotiate Medical Bills

What Can a Flexible Spending Account Be Used For?

Given the contribution limits and forfeiture rules of flexible spending accounts, FSA account holders usually want to be careful about calculating how much money they might be able to use — otherwise, significant amounts of their paycheck might end up right back in their employers’ hands.

FSA funds can be used for a wide range of out-of-pocket health care expenses, such as deductibles, coinsurance, and copayments. You can also use your FSA funds to pay for dental/orthodonture expenses, prescription eyeglasses/contacts, medications, psychological counseling, hearing aids, and many health-related over-the-counter items (including sunscreen).

It’s a good idea to check with your FSA provider to confirm which products and services are eligible to make sure you will be able to get reimbursed.

Keep in mind, too, that FSAs generally work in conjunction with other types of health benefits and coverage, and funds can’t be used to reimburse services that are covered under other health plans.

It might be a valuable exercise to write out all of the expected medical expenses you’ll face as a family at the beginning of the plan year in order to decide how much to contribute, including additional coverages, in order to avoid over-contribution. While nobody can predict the future, some routine expenses can be foreseen — and a little bit of planning might save a lot of forfeited funds in the end.

Recommended: 15 Creative Ways to Save Money

Taking Distributions from an FSA

The process for taking distributions from an FSA can vary based on the plan. In some cases, distributions are made from an FSA to reimburse the account holder for medical expenses they’ve incurred. Some FSAs also have a debit, credit, or stored value card that can be used to pay directly for qualifying expenses.

In order to take a distribution, the account holder may have to provide a written statement from the doctor or medical service provider that specifies the medical expense incurred, as well as a statement documenting that the expense hasn’t been covered by any other health plan. In other situations, a receipt may be sufficient documentation in order to be reimbursed.

FSA reimbursements are only available for verifiable medical expenses that have already been incurred, rather than expenses the account holder plans to incur in the future. (In other words, you can’t write to the FSA and tell them you’re going to the doctor next month.)

It’s also important to note that your FSA funds are available to you on the first day of your plan year, regardless of how much you’ve contributed.

Let’s say you elect to contribute $2,000 for the plan year, which runs January through December. Your employer will likely deduct that amount from your paychecks in equal increments over the course of the year. However, if you get hit with a $1,000 eligible medical expense on January 15th, you can still tap your FSA to cover it — you don’t have to wait until you’ve contributed $1,000.

Is a Flexible Spending Account Worth It?

A flexible spending account can be a helpful tool, but it’s not the only option for footing medical bills.

For one thing, $3,300 might not even scratch the surface of some common medical procedures, such as childbirth.

Furthermore, although the tax-free nature of FSAs is attractive, the prospect of forfeiting parts of a paycheck is definitely not — and there are other ways to save cash for medical expenses and other emergencies which offer not just flexibility, but growth.

If you want more flexibility, you might open a savings account offering a high yield and create an emergency fund to help pay medical expenses. Just keep in mind that you won’t get the tax benefits that come with an FSA. If you have a high-deductible health plan, you might choose to open an HSA. Funds in an HSA aren’t subject to use-it-or-lose-it rules and can be invested. Plus, the plan can go with you if you change employers.

The Takeaway

The tax benefits of the FSA can make them an appealing and useful tool, especially for those who know they’ll spend a decent amount out of pocket on health care.

But if you’re not sure how much you’ll be spending on health care, opening a high-yield savings account earmarked for health and medical expenses could be a smart move. This allows you to earn interest on your money, and you won’t have to forfeit any funds you don’t end up spending. Or, you might do both — contribute to an FSA while also setting money aside in a savings account you can tap if your expenses exceed your estimate or go beyond the cap for FSA savings.

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