A flexible spending account or flexible spending arrangement (FSA) is similar to a health savings account (HSA) in that both can be used to save for future medical expenses. There are some important differences between the two, however. An FSA must be offered by your employer and is a tax exempt way to save for prescriptions, copayments, deductibles, and other health related expenses. Find out if you are eligible, and if an FSA is a good method of savings for you.

Who can set up an FSA?

An FSA can only be established by an employer. There are no individual brokers or self-employment options for flexible spending accounts. An FSA is an option that an employer can offer to employees as part of a benefits package.

A health savings account is only available to those with a high deductible health insurance plan, but a flexible spending account can be used by anyone with any type of health insurance. You usually can not have both an HSA and an FSA. If you have an insurance policy that does not qualify as high deductible, but you still want to set money aside to help pay for medical expenses, an FSA can help you budget for those costs.

How to fund an FSA

You must start your FSA during the enrollment period for your employer. At that time, you will choose the total amount you wish to contribute for the year. This total will be spread out over the year and deducted directly from your pre-tax paycheck. This plan enables you to save what you need for medical expenses without payroll taxes taken out of that money. An employer is permitted make contributions to the account as well, but is not required to.

FSAs are pre-funded, meaning the total amount is available to you at any time of the year. Because you have already locked in the amount you will save, you can use the money before you have completely funded the account. For example, if you choose to fund your account for $1,000, the total $1,000 is immediately available for your use. You will pay that total into the account over the course of twelve months. If, for any reason, you leave that employer, you may be responsible to continue to pay for the FSA if you have taken out more money than you have contributed.

Unlike an HSA, an FSA does not roll over. You must use all of the funds in the account or you will lose the balance at the end of the fiscal year. The current 2020 maximum contribution for an FSA is $2,750 per year. Since you lose any money you don’t use, carefully examine how much you spend annually on medical care so you don’t put more in the account than you can use.

While there are some exemptions your employer may be able to offer, FSAs generally only last for one fiscal year. Each year you must choose to reenroll, commit to a total and start over at zero.

What can I use the money for?

Holders of an FSA will often receive a debt card they can use to pay directly for medical costs. Some plans require that you pay the expense up front then submit the bill for reimbursement. The money in the account can be used for medical care for you, your spouse, and your children. Fees that are covered by an FSA include:

  • Deductibles (but not premiums)
  • Prescriptions
  • Doctors visits
  • Copayments
  • Prescribed over-the-counter medication
  • Insulin
  • Medical equipment such as crutches
  • Baby health care items
  • Glasses or contact lenses
  • Dental care

Because of the tax benefit of an FSA, if you know you will need additional money to pay for medical costs through the year, and your employer offers the option, a flexible spending arrangement may help you plan and save on taxes. Be sure not to save more money than you will use since you can’t roll it over to the next year.


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