What is FSA?

An FSA is an employer-sponsored account where you set aside pre-tax money for medical or dependent care expenses. Use it or lose it by year-end. It allows employees to contribute pre-tax dollars from their salaries to pay for qualified medical expenses or dependent care costs. Because contributions are deducted from salary before federal income, Social Security, and Medicare taxes are calculated, FSAs reduce the employee's taxable income.

For the 2026 tax year, the contribution limit for a health FSA is $3,400 (up from $3,300 in 2025). Unlike HSAs, FSAs are subject to a strict 'use-it-or-lose-it' rule. Employees must generally spend all contributed funds within the plan year. Plans may offer a grace period of up to 2.5 months or allow a carryover of unused funds—up to $680 for plan years starting in 2026 ($660 in 2025). Any excess unused funds are forfeited to the employer.

FSAs are owned by the employer. If an employee leaves their job during the plan year, they forfeit any remaining balance. However, they can access the full annual election amount on day one of the plan year, before contributions are fully deducted.