Flexible Spending Account (FSA)
Definition
An employer-sponsored account that lets you set aside pre-tax dollars for qualified medical expenses or dependent care costs. For 2025, the health FSA contribution limit is $3,300. Unlike HSAs, FSAs have a "use it or lose it" rule, though employers may offer a grace period of up to 2.5 months or allow a carryover of up to $640. Dependent care FSAs allow up to $5,000 per year for childcare expenses.
Example
You contribute $2,000 to a health FSA. In the 22% tax bracket, this saves you $440 in federal income tax plus $153 in FICA taxes. You use the funds for copays, prescriptions, and glasses throughout the year.
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