What Is an FSA? How Flexible Spending Accounts Work

A flexible spending account (FSA) is an employer-sponsored benefit that lets you set aside money from your paycheck, before federal income tax and Social Security and Medicare taxes, to reimburse eligible health or dependent care expenses. For plan years beginning in 2026, you can generally contribute up to $3,400 to a health FSA, and the federal dependent care exclusion tops out at $7,500.

Health and dependent care FSAs follow different eligibility, reimbursement and carryover rules. Your employer's plan document determines which optional features are available. If you're also weighing an FSA vs. HSA decision, that comparison is worth reviewing before you enroll.

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Key Takeaways

• An FSA offers a federal tax advantage, not a savings account: You use pre-tax payroll contributions to reimburse eligible health or dependent care expenses, and your employer's plan controls the details.

• The 2026 health FSA limit rose to $3,400: That's up from $3,300 in 2025, and a limited-purpose health FSA generally shares the same limit.

• The 2026 dependent care exclusion is $7,500, or $3,750 if you're married filing separately: Congress enacted this increase through Public Law 119-21, not a routine IRS inflation adjustment.

• FSAs generally follow a use-it-or-lose-it rule: A health FSA may offer a carryover of up to $680 for 2026 or a grace period of up to two and a half months, but not both.

• Your employer may offer less than the federal maximum, or nothing at all: Review your specific plan before you decide how much to contribute.

Summary generated by AI, verified by MoneyLion editors.

How Does an FSA Work?

Your employer offers the FSA, and you generally choose how much to contribute during open enrollment. That amount gets deducted from your pay over the plan year. Because qualifying salary reductions are excluded from your federal taxable wages, they can lower your federal income and employment taxes, though how much you save depends on your contribution, your tax situation and state law.

Health FSAs and dependent care FSAs make your money available very differently:

• Health FSA: Under the uniform-coverage rule, your full annual election is generally available throughout your coverage period, regardless of how much has been deducted from your pay so far. If you elect $2,000 and your coverage begins Jan. 1, the plan generally makes that full amount available for eligible expenses incurred during the coverage period.

• Dependent care FSA: Reimbursement is generally limited to the amount already credited and available in the account when your claim is processed. You typically can't receive your full annual election before enough contributions have accumulated.

Either way, an expense must be incurred while you're covered and meet your plan's eligibility and substantiation rules. An FSA generally can't reimburse expenses you merely expect to have in the future.

Why an FSA May Matter

Using an FSA can lower the after-tax cost of eligible expenses you expect to pay anyway, though the actual benefit varies based on your federal and state tax treatment, payroll taxes, contribution amount and whether you end up forfeiting unused funds.

An FSA may be worth considering if:

• Your employer offers one.

• You expect eligible medical, dental, vision or dependent care expenses.

• You can reasonably estimate those expenses.

• You understand your plan's deadlines, reimbursement procedures and forfeiture rules.

An FSA isn't automatically the right choice for everyone. Contributing more than you can realistically use may cancel out part of the tax benefit if those unused funds get forfeited.

What Are the Types of FSAs?

There are a few distinct types of FSAs to consider. Here's a breakdown of each:

Health FSA

A health FSA reimburses eligible medical expenses for you and certain eligible family members. Health FSAs are employer-established plans, so self-employed people generally can't participate, though employers may also contribute if the plan allows it.

The 2026 employee salary-reduction limit is $3,400 per employee, not per household. That means spouses who are each eligible through separate employers may generally each elect up to $3,400 in their own health FSA, and employer contributions may be available on top of that, subject to the plan's design.

Limited-Purpose FSA

A limited-purpose FSA is designed primarily for eligible dental and vision expenses and is often paired with a high-deductible health plan (HDHP) and a health savings account (HSA).

Depending on its terms, a limited-purpose FSA may also reimburse qualifying preventive-care expenses. Some plans can become post-deductible FSAs once the applicable HSA deductible has been met, which lets them reimburse a broader range of eligible medical expenses after that point, but plan terms control. Because it's a type of health FSA, a limited-purpose FSA generally shares the $3,400 employee salary-reduction limit for 2026.

Dependent Care FSA

A dependent care FSA, formally part of a dependent care assistance program, reimburses qualifying care expenses that let you, and generally your spouse if you're married, work or look for work.

Eligible care may include:

• A qualifying child who was under age 13 when the care was provided.

• A spouse who is physically or mentally incapable of self-care and meets applicable residency requirements.

• Another qualifying person who is physically or mentally incapable of self-care and meets applicable dependency and residency rules.

Special rules can apply to divorced or separated parents, people who would qualify as dependents except for certain tax-return rules, and spouses who are full-time students or incapable of self-care.

For 2026, the maximum federal exclusion is $7,500, or $3,750 for a married person filing separately. A married couple filing jointly doesn't get two separate $7,500 federal exclusions just because both spouses have access to dependent care plans. The amount you can exclude is generally limited by the smallest of the benefits received, your qualifying expenses, your earned income, your spouse's earned income when applicable, and the amount your employer's plan allows.

2026 FSA Contribution Limits

The 2025 health FSA salary-reduction limit was $3,300, and the maximum carryover was $660, for comparison.

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What Expenses Qualify for a Health FSA?

A health FSA generally reimburses expenses that qualify as medical care under federal tax rules and are included under your employer's plan. Examples may include:

• Deductibles, copayments and coinsurance

• Prescription medicines

• Over-the-counter medicines, whether or not prescribed

• Dental exams, treatment and eligible orthodontic expenses

• Eye exams, prescription glasses and contact lenses

• Menstrual care products

• First-aid supplies, like bandages

• Eligible medical equipment and supplies used to diagnose, treat, mitigate or prevent illness

Items marketed primarily for general health, personal use or cosmetics may not qualify. Products like sunscreen or heating pads can depend on the item's medical purpose, plan terms, substantiation requirements and administrator interpretation, so check with your FSA administrator before assuming an expense is reimbursable. Insurance premiums, long-term-care expenses and costs reimbursed by another health plan generally can't be reimbursed from a health FSA.

What Expenses Qualify for a Dependent Care FSA?

Qualifying expenses may include:

• Daycare

• Preschool or nursery school

• Before- and after-school care

• A qualifying babysitter, nanny or household caregiver

• Day camp

• Eligible adult day care

The care must generally let you and your spouse, if you're filing jointly, work or actively look for work. Overnight camp, kindergarten tuition and higher-grade tuition generally don't qualify, although before- or after-school care may. The care provider generally can't be your spouse, the parent of your qualifying child who's under age 13, your dependent or your child who was under age 19 at year-end, and provider-identification and other tax-reporting rules also apply.

Use-It-or-Lose-It, Carryovers and Grace Periods

FSAs are generally subject to a use-it-or-lose-it rule, meaning unused money may be forfeited after your plan's deadlines. For a health FSA, an employer may offer:

• A carryover: Unused funds move into the following plan year, up to $680 for a plan year beginning in 2026.

• A grace period: You get up to two and a half months after the plan year ends to incur eligible expenses using the prior year's balance.

A health FSA can't offer both a carryover and a grace period for the same plan year. A plan may offer neither, and it may set a carryover below the federal maximum.

Dependent care FSAs don't receive the standard health-FSA carryover, though a dependent care plan may provide a grace period of up to two and a half months. Temporary pandemic-era carryover rules were limited exceptions and shouldn't be treated as the general rule.

Grace Period vs. Run-Out Period

• Grace period: Additional time after the plan year to incur eligible expenses using the prior year's balance.

• Run-out period: Additional time to submit claims for expenses already incurred during the plan year, or during an applicable grace period.

A run-out period doesn't extend the date by which an expense must be incurred. Claim-submission deadlines are set by the plan, and the IRS generally can't waive a missed plan deadline because of hardship.

What Happens to Your FSA if You Leave Your Job?

A health FSA generally doesn't move with you to a new employer. When your employment and FSA coverage end, unused funds may be forfeited, although the plan may let you submit claims during its run-out period for eligible expenses you incurred before coverage ended.

Don't treat "spend the money before your last day" as a universal rule. The expense must be incurred while coverage is in effect, and the exact termination date and claim deadline depend on your plan.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) may allow you to continue group health coverage after certain job or life events. Special COBRA rules apply to health FSAs, and continuation may be required only in limited circumstances, generally when the remaining reimbursement available exceeds the COBRA premium that could be charged for the rest of the plan year. Carryover amounts may factor into that calculation.

If health FSA COBRA coverage is available and you elect it, you may need to pay the full cost plus an allowed administrative charge using after-tax money. Confirm your options and deadlines with the plan administrator before employment ends.

FSA vs. HSA: What's the Difference?

To contribute to an HSA, you generally must have qualifying HDHP coverage, no disqualifying health coverage, no Medicare enrollment and no status as another person's tax dependent. HSA funds are individually owned, portable and carry over from year to year, which is a meaningfully different trade-off than an FSA's forfeiture risk.

A general-purpose health FSA generally makes you ineligible to contribute to an HSA because it provides disqualifying coverage. A properly structured limited-purpose or post-deductible FSA can be HSA-compatible. Coverage through a spouse's general-purpose health FSA may also affect your eligibility if that FSA can reimburse your expenses.

How To Choose an FSA Contribution

1. Tally last year's eligible expenses: Pull together receipts and statements for recurring prescriptions, dental work, vision expenses, copayments or regular dependent care.

2. Project this year's expenses: Note any planned procedures, known copayments or expected changes to your dependent care needs.

3. Check for other reimbursement sources: Confirm whether insurance, another account or another person will cover any of those costs first.

4. Confirm your plan's carryover or grace period: Ask whether your employer offers either feature, since that affects how much risk you're taking on.

5. Note your coverage dates and claim deadline: Find out when coverage begins and ends, and when claims must be submitted.

6. Check for HSA and tax-credit interactions: Confirm whether health FSA coverage affects HSA eligibility, and whether dependent care benefits could affect your child and dependent care tax credit.

Avoid choosing a contribution solely to maximize your tax exclusion. A realistic estimate reduces the risk of forfeiture, though your personal circumstances and plan rules can still change during the year. If you're setting money aside for medical costs that fall outside what your FSA covers, or saving beyond the $3,400 annual limit, a separate high-yield account like MoneyLion Save can hold that cushion so it's ready when you need it.

Common FSA Mistakes

• Assuming every health-related expense is eligible: Many general-health and cosmetic items don't qualify.

• Confusing a run-out period with additional time to incur expenses: It only extends the time to file claims, not the time to spend.

• Assuming the full annual election is immediately available from a dependent care FSA: Reimbursement is capped by what's been contributed so far.

• Treating the $7,500 dependent care limit as automatically available: Your earned income and filing status can limit it further.

• Forgetting that a general-purpose health FSA can affect HSA eligibility: Confirm compatibility before enrolling in both.

• Assuming a new employer's plan will accept funds from a previous employer's FSA: FSAs generally don't transfer between employers.

• Waiting until after coverage ends to incur an expense: The expense generally must happen while you're covered.

• Failing to keep receipts or provide requested substantiation: This can delay or deny your reimbursement.

• Assuming your employer offers the maximum carryover, or any carryover at all: Check your plan document instead of assuming.

The Bottom Line

An FSA can provide a federal tax advantage when you use it for eligible expenses and follow your plan's rules. For 2026, employees may generally elect up to $3,400 through salary reduction for a health FSA, while the federal dependent care assistance exclusion is up to $7,500, or $3,750 if married filing separately, subject to additional limits and plan terms.

Before enrolling, confirm eligible expenses, coverage dates, claim deadlines, carryover or grace-period provisions and HSA compatibility with your employer or plan administrator. Consult a qualified tax professional for advice about your individual tax situation.

FAQ

Here are quick answers to common questions about flexible spending accounts:

Can I use my health FSA for my spouse or children?

Generally, yes. A health FSA can reimburse eligible expenses for you, your spouse, tax dependents and certain people who would qualify as dependents except for specified federal tax rules. It may also reimburse eligible expenses for your child who's under age 27 at the end of the tax year, even if that child isn't your tax dependent.

Can both spouses have health FSAs?

Yes, if each spouse is eligible through an employer. The $3,400 employee salary-reduction limit applies per employee for plan years beginning in 2026, so each spouse may generally elect up to $3,400 in a separate health FSA. The same expense can't be reimbursed twice.

Is the dependent care FSA limit $7,500 per child?

The $7,500 amount is the maximum 2026 federal exclusion, not a per-child limit. Married couples filing jointly generally share that exclusion. The amount you can exclude may be lower because of qualifying expenses, earned-income restrictions, employer-plan limits or other rules.

Can I change my FSA contribution during the year?

Generally, your election stays in place for the plan year. A change is possible only when federal cafeteria-plan rules and your employer's plan allow it, like after certain qualifying life events.

What happens if I don't use all my health FSA money?

Unused funds may be forfeited. If your employer's plan allows it, you may instead carry over up to $680 for 2026 or use a grace period of up to two and a half months. A health FSA can't offer both features for the same plan year.

Can a dependent care FSA carry money into the next year?

Not under the standard health-FSA carryover rule. A dependent care plan may offer a grace period, and it may provide a run-out period for submitting claims, so review your plan document for exact deadlines.

Can I have both an FSA and an HSA?

A general-purpose health FSA generally prevents HSA contributions. You may be able to use an HSA alongside a properly structured limited-purpose or post-deductible FSA.

Key Terms

• Carryover: An optional health FSA feature that lets unused funds, up to the applicable limit, pay or reimburse eligible expenses in the following plan year.

• COBRA: Temporary continuation of employer group health coverage after certain qualifying events.

• Dependent care FSA: An employer-sponsored dependent care assistance arrangement used to reimburse qualifying work-related care expenses, subject to earned-income, filing-status, expense and plan limits.

• Grace period: An optional period of up to two and a half months after a plan year during which eligible expenses may be incurred using the prior year's unused balance.

• Health FSA: An employer-established arrangement that reimburses eligible medical expenses.

• Limited-purpose FSA: A health FSA generally limited to dental, vision and certain other HSA-compatible benefits specified by the plan.

• Run-out period: A plan-specific period for submitting claims for eligible expenses incurred by the applicable deadline.

• Uniform-coverage rule: The rule generally requiring the full annual health FSA election to be available during the coverage period, regardless of contributions made to date.

Summary generated by AI, verified by MoneyLion editors.

Sources

• IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans

• IRS Publication 502: Medical and Dental Expenses

• IRS Publication 503: Child and Dependent Care Expenses

• IRS Revenue Procedure 2025-32

• Congress.gov: Public Law 119-21

• IRS Publication 15-B: Employer's Tax Guide to Fringe Benefits

• U.S. Department of Labor: COBRA Continuation Coverage