Flexible Spending Accounts (FSAs): Benefits & How They Work
A Flexible Spending Account (FSA) lets employees set aside pre-tax dollars for eligible health care and dependent care expenses—lowering taxable income and making out-of-pocket costs more manageable. You’re reimbursed for qualified expenses up to your annual election during the plan year (and any applicable grace period).
Understanding the “Use-it-or-Lose-it” Rule
The IRS requires that unused FSA funds be forfeited after the plan year ends (plus any grace period). Smart planning helps you capture the tax savings without leaving money behind.
- Contribution estimates
- Choose your annual election during open enrollment.
- Aim to cover expected expenses while minimizing potential forfeitures.
- Grace period option
- Employers may allow up to 2.5 months after year-end to spend remaining funds.
- For a 12/31 plan year, you’d typically have until 3/15.
- Offered at the employer’s discretion and must be elected in plan design.
- Carryover option
- Employers may allow up to $640 (2024 plan year) to carry over to the next year.
- Optional—must be adopted by the employer.
- Carryover is only available if the plan does not also use a grace period (e.g., on a Marketplace insurance plan).
Types of FSAs
There are two main FSAs, and funds cannot be interchanged between them:
Health Care FSA
Reimburses eligible medical expenses you incur during the plan year, up to your election. The IRS contribution limit was $3,050 for 2023 and is $3,200 for 2024. Eligible “medical care” generally includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease.
Common eligible expenses: health plan deductibles/copays, prescriptions, eye exams, eyeglasses/contacts, hearing exams/hearing aids, routine physicals, and smoking-cessation programs. (See IRS guidance for the complete list.)
Dependent Care FSA
Helps pay for care that enables you (and your spouse, if filing jointly) to work—such as daycare, after-school care, or elder care. Covers children under 13 and adult dependents who can’t care for themselves.
- Annual contribution limit: Up to $5,000 (subject to IRS rules under Section 129 and your household situation).
- Availability of funds: Only as contributions are actually deposited (unlike Health FSAs).
- Reimbursement timing: Expenses are reimbursed after services are incurred (pre-billed care must be claimed after the service dates).
Make the Most of Your FSA
- Estimate expenses (rx, routine care, planned procedures, childcare calendars) before you elect.
- Track balances and key dates (run-out, grace period, or carryover, if offered).
- Keep receipts—substantiation is required for eligible claims.
Get Help from CBC
Custom Benefit Consultants, Inc. (CBC) offers comprehensive, affordable benefits solutions—including FSAs—to fit diverse employee needs. Explore options and maximize your tax savings, then contact us to get started.
FAQs
What is a Flexible Spending Account (FSA)?
An FSA is a pre-tax benefit account for qualified health care and dependent care expenses, reducing your taxable income and smoothing out-of-pocket costs.
What expenses can an FSA cover?
Eligible items include medical copays/deductibles, prescriptions, vision (glasses/contacts), and dependent care (daycare, after-school programs, certain elder care). Check IRS rules and ask CBC for help with specifics.
How do I avoid losing funds?
Elect conservatively based on expected needs. If your employer offers them, use the grace period or carryover (up to $640 for 2024) to capture remaining dollars.
What are the contribution limits?
For 2024, Health Care FSA: $3,200. Dependent Care FSA: up to $5,000 (varies by household and IRS rules). Plan wisely to maximize tax savings.
How do Dependent Care FSA reimbursements work?
Funds become available as you contribute, and claims are reimbursed after care is provided (you may pay providers up front, then submit for reimbursement).
