What's a flexible spending arrangement (FSA)

Flexible spending arrangement (FSA) definition and meaning

A flexible spending arrangement (FSA) is an employer-sponsored account that allows employees to contribute pre-tax funds to cover qualifying medical expenses. These may include copays, over-the-counter medications, prescription drugs, and medical equipment. While FSAs can help offset a variety of out-of-pocket medical expenses, they don’t cover health insurance premiums or long-term care services.

How do FSAs work?

If an employer offers an FSA, an employee may set up payroll deductions to add money to the account on a pre-tax basis and reduce their taxable income as a result. The employer may contribute to the account as well. In most cases, unused funds in an FSA don’t carry over into the next year so employees must use them or they’ll lose them.

Keep in mind that employers can offer a grace period or allow some of the funds to roll over. In 2025, employees may contribute up to $3,300 to an FSA. If both spouses have an FSA, however, they can each contribute up to $3,300.

Types of FSAs

The most common type of FSA and the one we’ve defined in this glossary is a healthcare FSA. Also known as a medical FSA, this account gives employees the chance to save on out-of-pocket medical costs. Other types of FSAs include:

• Dependent care FSA: A dependent care FSA is for employees who want to cover eligible dependent care services. These may include babysitting, daycare, preschool, nanny care, after-school programs, and eldercare.
• Adoption FSA: An adoption FSA is for employees who would like to allocate pre-tax funds for adoption-related expenses. It can help make the adoption process more affordable.
• Commuter FSA: A commuter FSA is intended to offset the costs of commuter services related to employment. The two types of commuter FSAs include the parking FSA and transit FSA.
• Limited-purpose FSA: A limited-purpose FSA is for employees who wish to cover qualifying vision and dental expenses. Since this type of account doesn’t pay for traditional medical expenses, it’s often paired with a health savings account (HSA).

Benefits of FSAs for employees

Through an FSA account, employees can lower their taxable income and save on healthcare expenses throughout the year. Even if they haven’t fully contributed to it, the entire amount of an employee’s contribution is available upfront on the first day the plan year begins. FSAs are particularly beneficial for employees who have ongoing annual medical expenses.

Why do employers offer FSAs?

By adding FSAs to a company’s benefit plan, employers can save on payroll taxes because the employee contributions are not subject to Social Security, Medicare, or federal income taxes. FSAs may also serve as a powerful employee retention tool and lead to increased productivity and satisfaction in a highly competitive job market. In addition, FSAs can aid employers in complying with the Affordable Care Act (ACA) and other important healthcare regulations.

Who sets the eligibility requirements for a flexible spending arrangement​?

FSAs are only available through employers. This means that employees may choose to contribute to them as long as their employers offer them. FSAs are not an option to those with marketplace health plans, business owners who are sole proprietors, or those with 2% or more ownership in an S corporation, LLC, LLP, PC, or partnership.

HSA vs. FSA account differences

Both Health Savings Accounts (HSAs) and FSAs are designed to help employees cover healthcare costs. An HSA, however, is only compatible with a high-deductible or HSA-qualified health insurance plan. An FSA, on the other hand, is an option with any type of health care coverage offered by an employer.

While an FSA makes the entire annual contribution amount available to employees on the first day of the plan year, funds expire at the end of each plan year and unused dollars will be returned to the employer. HSA funds, however, never expire so employees can keep them, even if they switch jobs, health insurance plans, or leave the workforce altogether.