What is an FSA?

A flexible spending account (FSA) is an employer-owned funding vehicle that allows Americans to use pre-tax income to pay for eligible out-of-pocket medical expenses not covered by insurance.

How does an FSA work?

Consumers enroll in an FSA through their employer and choose an annual dollar amount to contribute, pre-tax, up to a certain limit set by the government. These elected FSA funds are available immediately on a benefit debit card that consumers can use on eligible healthcare items and procedures. The elected amount is then paid back throughout the year with a consumer’s pre-tax income, employer contributions or both. A limited amount of FSA dollars can be rolled over to the next year, if an employer allows it. Any unspent funds beyond the rollover are forfeited to the employer. Consumers must also forfeit funds to their employer if they leave the company.

What are the benefits of an FSA?

Healthcare costs in the U.S. continue to rise, with consumers shouldering more of the costs of their care. An FSA can help make a consumer’s predictable annual medical expenses more affordable by using pre-tax dollars to pay for them. In fact, American consumers can save 30% on out-of-pocket medical costs by using an FSA.

What can I use my FSA for?

Consumers can use their FSA funds on out-of-pocket medical expenses not covered by their insurance. Typically, consumers receive a benefit debit card with which to make these purchases. Eligible items include doctor’s office visits, treatments, diagnostic tests, lab fees, medical devices, vision, dental, prescriptions, pharmacy items and various wellness items. Consumers can also visit online sites like FSAStore.com to purchase exclusively FSA-eligible items.

What is an FSA rollover and an FSA grace period?

Every year, the government sets an FSA rollover amount. This means consumers can carry over a certain amount of unused FSA dollars from the previous year into their next year’s FSA, if their employer writes that measure into their plan. The FSA rollover amount increased this year, with consumers now able to roll over up to $550 of unused 2020 FSA funds into 2021.

Employers can also offer an FSA grace period – a few additional months of the next plan year during which consumers can spend their unused FSA dollars from the previous year. Typically, an FSA grace period is two-and-a-half months, with consumers able to use the previous year’s unused fund until March 15 of the next year.

FSA limits and rules

Overall FSA rules:

  • Consumers must forfeit any unused funds at the end of a plan year (beyond the rollover amount) to the employer.
  • Consumers must forfeit any unused funds to the employer if they leave the company.

Rules that may change each plan year:

  • Contribution limit: The 2021 FSA contribution limit is $2,750.
  • Rollover amount: The 2021 FSA rollover amount is $550.