What Is an FSA? Flexible Spending Account Explained

Flexible Spending Accounts are one of the most widely offered — and most misunderstood — employee benefits in the United States. Used correctly, an FSA can save you hundreds or even thousands of dollars annually in taxes. Used carelessly, you can lose money you've already set aside. Here's a complete guide to how FSAs work and what to do when reimbursements are denied.

What Is an FSA?

A Flexible Spending Account (also called a Flexible Spending Arrangement) is an employer-established benefit account that allows employees to set aside pre-tax dollars to pay for eligible medical expenses and, in some cases, dependent care expenses. The money is deducted from your paycheck before income taxes, reducing your taxable income.

Unlike an HSA, an FSA:

• Does not require you to be enrolled in a high-deductible health plan
• Is available through your employer — you cannot open one independently
• Is generally subject to use-it-or-lose-it rules (funds don't roll over indefinitely)
• Can be funded by both employer and employee contributions

Types of FSAs

Health FSA (Healthcare FSA) The most common type. Used for eligible medical, dental, and vision expenses for you, your spouse, and tax dependents.

Dependent Care FSA (DCFSA) Covers eligible child care and adult dependent care expenses for dependents that allow you (and your spouse) to work. Not to be confused with a Healthcare FSA — these are separate accounts with different rules.

Limited-Purpose FSA (LPFSA) Used only for dental and vision expenses. Available to people enrolled in an HSA — allows them to preserve HSA funds while still getting the pre-tax benefit on dental and vision costs.

2025 FSA Contribution Limits

• Healthcare FSA: $3,300 per year (employee contribution)
• Dependent Care FSA: $5,000 per year ($2,500 if married and filing separately)

Employers may also contribute to your healthcare FSA (adding to the employee limit) but dependent care FSA contributions from employers have separate rules.

The Use-It-or-Lose-It Rule

This is the most important FSA feature to understand. FSA funds typically must be used within the plan year. If you have money remaining at the end of the year, you lose it.

There are two potential relief options employers can choose to offer (not required):

Grace period: Employers can give you up to 2.5 months after the plan year ends to use prior-year funds. So if your plan year ends December 31, you'd have until March 15 to incur eligible expenses and use remaining funds.

Carryover: Employers can allow you to carry over up to $660 (2025 limit, indexed for inflation) of unused FSA funds to the next plan year — no time constraint on using those carried over funds.

An employer can offer either a grace period or a carryover, but not both. Review your plan documents to know which option your plan uses — or whether it offers neither.

Termination of employment: When you leave your employer, FSA access typically ends on your last day of employment (or the last day of the month, depending on the plan). Any unspent funds are forfeited unless your plan offers a run-out period. Some plans allow you to continue your FSA through COBRA, but you must pay for the full year's election in premiums.

Eligible Expenses

Healthcare FSA eligible expenses are defined by IRS Code Section 213(d). Common eligible expenses include:

• Doctor, dentist, and vision office visits and copays
• Prescription medications
• Over-the-counter medications (eligible since 2020 CARES Act, no prescription required)
• Menstrual care products (since 2020)
• Medical equipment (bandages, blood pressure monitors, crutches)
• Glasses, contact lenses, and LASIK
• Mental health therapy and substance use treatment
• Chiropractic and acupuncture
• Physical therapy

Notable ineligibles: cosmetic procedures, gym memberships (unless medically prescribed), vitamins without medical prescription, toiletries.

Common FSA Reimbursement Denials

1. Non-eligible expense. Submitting a vitamin supplement, gym membership, or cosmetic procedure. The FSA administrator will deny the reimbursement and return the claim.

2. Insufficient documentation. You need an itemized receipt showing: date of service, provider name, description of service, and amount. A credit card statement or general receipt isn't enough.

3. Expense outside the plan year. If you submit a December expense in February after the plan year ended and your plan doesn't have a grace period or run-out window, it will be denied.

4. Dependent not qualifying. For dependent care FSAs, the dependent must meet IRS definition. If you claimed care for a 14-year-old (the cutoff is 13 unless the child is disabled), the expense is ineligible.

5. Double-dipping. You cannot claim an FSA reimbursement and also claim the same expense as a medical deduction on your tax return or get insurance reimbursement for it. FSA administrators look for this.

How to Appeal an FSA Denial

Step 1: Request the denial reason in writing from your FSA administrator.

Step 2: Confirm the expense is IRS-eligible (reference IRS Publication 502 for the official eligible expense list).

Step 3: Gather proper documentation: itemized receipt, EOB if insurance was involved, and if needed, a Letter of Medical Necessity (LMN) from your physician.

Step 4: Submit a written appeal to your FSA administrator. Include all supporting documentation. Many denials are reversed when proper documentation is provided.

Step 5: If your employer's FSA plan is governed by ERISA (most employer-sponsored FSAs are), you have a right to a full and fair review of denied claims. If appeals are exhausted, you can escalate to the Department of Labor's Employee Benefits Security Administration.

Year-End FSA Planning Tips

• Check your balance in October or November — don't wait until December.
• Schedule eligible appointments (dental cleanings, eye exams) before year-end.
• Stock up on FSA-eligible over-the-counter items.
• Know whether your plan has a grace period or carryover.
• Save every itemized receipt for every FSA-eligible purchase throughout the year.

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Related Reading:

• How to Write an Insurance Appeal Letter
• What Is Medical Necessity?
• Internal vs External Insurance Appeal