What is an FSA? 3 Types For Your Unique Needs

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You're wondering “What is an FSA?” There are three primary types, and each has a different contribution limit & eligible expenses. Learn which FSA is right for you. And discover how your pre-tax contributions could save you thousands a year.

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Editor’s note: This post was originally published on July 6, 2017 and updated on August 27, 2020.

You’re wondering, “What is an FSA?” An FSA, or Flexible Spending Account, is a savings account. They are great for reducing the taxable income of an FSA account holder. And are used to deposit and save pre-tax money in an FSA to pay for qualified expenses.

Depending on the kind of FSA you open, annual contribution limits and qualified expenses vary. Using pre-tax FSA contributions for out-of-pocket expenses could save you thousands a year. It all depends on your tax bracket.

How to Qualify for an FSA

To qualify for an FSA, your employer must offer one. This means you can’t open an FSA in the private market. Here's what you can do.

Take advantage of your employer’s FSA offering. Even without participating in an employer-sponsored group health plan. In fact, there are no health plan requirements for opening a Healthcare FSA or Limited Purpose FSA. With an FSA, you continue to have the ultimate freedom to choose the health insurance strategy that works for you and your family.

To qualify for a Dependent Care FSA you must have at least one of the following who lives with you most of the time:

  • A minor dependent (under the age of 13)
  • A child over the age of 13 who can’t take care of themselves
  • An adult-dependent who can’t take care of themselves

There's a stipulation in the case that you and the child’s/children’s other parent are either divorced or do not live in the same household. Only the parent with primary custody is eligible to contribute to and use a Dependent Care FSA.

The Three Most Popular Types of FSAs


The three most popular types of FSAs are Healthcare FSA, Limited Purpose FSA, and Dependent Care FSA.

You can take part in all three at once (if your employer offers all three). Or any combination of them, depending on what’s available to you and what makes sense for your situation.

  1. Healthcare FSA: Contributions made to these types of accounts are used for qualified medical expenses. You can’t contribute money to both a Health Savings Account (HSA), paired with a High Deductible Health Plan, and a healthcare FSA at the same time. But you can use previous HSA contributions while you’re actively contributing to a Healthcare FSA.
  2. Limited Purpose FSA: Contributions to these types of accounts are for qualified dental and vision expenses. Because you can use your money for a limited number of expenses, the IRS allows you to contribute to this type of FSA and an HSA at the same time.
  3. Dependent Care FSA: Contributions to this type of FSA must be used for dependent care costs that allow you, a full-time caretaker of either a minor or adult dependent, to work or look for work. That means date night babysitters are out of the question. But childcare or adult daycare, while you’re at work, are acceptable. You can also pair a Dependent Care FSA with an HSA if that makes sense for your situation.

What You Can Buy with Your FSA Money


Healthcare FSA

Qualified health care expenses include, but are not limited to:

  • Copays
  • Coinsurance
  • Deductibles
  • Medical supplies like band-aids, joint braces, and crutches
  • Hearing aids
  • Sunscreen
  • Prescriptions
  • Over-the-counter drugs with a prescription (insulin refills don’t need a prescription)
  • Out-of-pocket expenses you incur for diagnostic tests, and in-patient and out-patient procedures. Provided they are considered “qualified” by the IRS.
  • Anything you can find on the FSA Store

Note: You can use your FSA contributions to pay for expenses incurred by yourself, your spouse, and your dependents.

Discover the rules of a Healthcare FSA and if it makes sense for you.

Limited Purpose FSA

Qualified dental and vision expenses include but are not limited to:

  • Copays
  • Coinsurance
  • Deductibles
  • Eye exams
  • Contact lenses
  • Eyeglasses
  • Teeth cleanings
  • Out-of-pocket expenses for dental and vision procedures. Provided they are considered “qualified” by the IRS.

Note: You can use your FSA contributions to pay for expenses incurred by yourself, your spouse, and your dependents.

Discover the rules of a Limited-Purpose FSA and if it makes sense for you.

Dependent Care FSA

The IRS considers the following eligible dependent care expenses:

  • Wages or fees for a babysitter, nanny, au pair, daycare or summer camp
  • Activity fees
  • After-school programs
  • Preschool tuition
  • Adult daycare
  • Payroll taxes for caregivers
  • Transportation costs for caregivers

Discover the rules of a Dependent Care FSA and if it makes sense for you.

Contributing to Your FSA


If you decide you want to contribute to an FSA, you must elect to do so during your employer’s open enrollment or a special enrollment period. You must also choose your annual contribution amount at that time. Make sure to adhere to the annual limits the IRS sets for each account. For the year 2021, the limits are as follows:

Healthcare FSA: $2,750. Healthcare FSAs are only opened on an individual basis. So the annual limits are the same whether you’re one person or a family of five covered under a family plan. If your spouse also has the option to open a Healthcare FSA through their place of employment, they are free to do that. And contribute up to the maximum allowable amount.

Limited Purpose FSA: $2,750. Like a Healthcare FSA, a Limited Purpose FSA is opened on an individual basis. If you and your spouse both have the option of opening separate accounts through your employers, you are free to do that. And contribute up to the maximum allowable amount in each account.

Dependent Care FSA: $5,000 for individuals or married couples filing jointly, and $2,500 for married couples filing separately.

Note: The IRS sets the annual contribution limits for FSAs and they are subject to change on an annual basis. Before you make your annual contribution election, make sure you have the most up-to-date information for your plan year.

Does My FSA Rollover at Year-End?


No, your FSA contributions do not rollover at the end of your plan year. Your employer has the option to offer (but is not required) one of the two following solutions for people with FSA funds left in their account at the end of the year:

  • A Grace Period: 2.5 months extra for the employee to use his or her FSA contributions from the prior year. After the grace period, any unused funds are turned over to the employer.
  • A Carry-Over: For 2021 the IRS increased the carryover limit for Healthcare and Limited Purpose FSAs from $500 to $550. The IRS decided the carryover limit will be assessed annually and tied to inflation, the number adjusting to the next lowest multiple of $10. An allowable carry over up to $500 will remain for Dependent Care FSAs.

Is an FSA Right for Me?

FSAs are a great way to save money, pre-tax, for expected medical, dental, vision, and dependent care expenses for the coming year. They offer flexibility in terms of health insurance plans and dependent care. And can result in thousands of dollars of savings, depending on your tax bracket.

To take full advantage of FSA benefits, make sure you take the time to assess your needs and make your annual election. As always, if you have any questions about FSA accounts offered by your employer, reach out to your HR department.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

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