Short answer: A Flexible Spending Account (FSA) allows employees to set aside pre-tax dollars to pay for eligible medical or dependent care expenses, reducing taxable income, but unused funds are generally forfeited.
A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to contribute a portion of their pay on a pre-tax basis to cover eligible out-of-pocket expenses. Common eligible expenses include copayments, prescriptions, medical supplies, and certain dental and vision costs not fully covered by insurance.
Because FSA contributions are excluded from federal income tax, Social Security tax, and Medicare tax, participating employees typically reduce their overall taxable income. Employers may choose to contribute to an employee’s FSA, but employer contributions are not required.
FSAs are subject to a “use it or lose it” rule. Amounts not used by the end of the plan year are forfeited, although some plans allow a limited grace period or a capped rollover amount if permitted by the employer’s plan design.
FSAs are distinct from other tax-advantaged health accounts, such as Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs), which operate under different rules and eligibility requirements.
Sources
- Internal Revenue Service, Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans: https://www.irs.gov/publications/p969
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Internal Revenue Code, Section 125: https://www.law.cornell.edu/uscode/text/26/125
Content history
Originally published: March 25, 2025
Last reviewed: January 25, 2026