A flexible spending account is an employer-sponsored benefit that lets you route part of your paycheck into a dedicated account before taxes are calculated, then spend that money on medical bills or dependent care costs your insurance doesn’t cover. For 2026, you can put up to $3,400 into a health care FSA and up to $7,500 into a dependent care FSA if you file jointly. Because the contributions skip federal income tax, Social Security and Medicare taxes, and usually state tax, each dollar you set aside goes further than the same dollar taken home in wages.
How the Tax Savings Work
When you enroll, your employer subtracts your chosen amount from each paycheck before running the tax math. The money never lands on your W-2 as taxable wages. The legal authority comes from Internal Revenue Code Section 125, which allows “cafeteria plans” where employees pick among tax-free benefits without triggering income.1Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans
The concrete effect: if you’re in the 22% federal bracket and contribute the full $3,400 to a health care FSA, you avoid roughly $748 in federal income tax alone, plus another 7.65% in payroll taxes. One boundary worth noting up front: self-employed people can’t open an FSA. The account only exists through an employer’s benefit plan.
Types of Flexible Spending Accounts
Most employers offer two or three FSA options, each with its own eligible expenses. Money in one account can’t be moved to another, so how you split your election matters.
Health Care FSA
The most common type. It pays for medical, dental, and vision expenses for you, your spouse, and your dependents that insurance doesn’t fully cover, including co-pays, prescriptions, eyeglasses, and physical therapy.2HealthCare.gov. Using a Flexible Spending Account (FSA) One big feature: your full annual election is available on day one of the plan year. Elect $3,400 in January, need knee surgery that same month, and you can use the entire amount immediately even though only a fraction has been deducted from your paychecks so far.
Dependent Care FSA
This one covers the cost of caring for children under 13, or a disabled spouse or dependent, so you can work or look for work. Eligible expenses include daycare, preschool, before- and after-school programs, summer day camps, and in-home care.3FSAFEDS. Dependent Care FSA (DCFSA) Overnight camps do not qualify. Unlike the health care FSA, you can only be reimbursed up to what you’ve actually contributed through payroll so far.
Limited Purpose FSA
If you have a health savings account paired with a high-deductible health plan, a regular health care FSA would knock you out of HSA eligibility. A limited purpose FSA fixes that by restricting coverage to dental and vision expenses only, letting your HSA contributions continue.4FSAFEDS. Limited Expense Health Care FSA (LEX HCFSA) The 2026 limit is the same $3,400 as a standard health care FSA.5FSAFEDS. New 2026 Maximum Limit Updates
2026 Contribution Limits
The IRS adjusts these limits every year. For 2026:
- Health care FSA or limited purpose FSA: up to $3,400 per employee. If both spouses have an FSA through separate employers, each can contribute the full amount.5FSAFEDS. New 2026 Maximum Limit Updates
- Dependent care FSA: up to $7,500 per household for single filers or married joint filers, and $3,750 for married filing separately. Your exclusion also can’t exceed the earned income of the lower-earning spouse.6Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs
- Minimum election: most plans require at least $100 per year.5FSAFEDS. New 2026 Maximum Limit Updates
Deductions come out evenly across the plan year. A $3,400 election on a biweekly schedule works out to about $131 per check.
What You Can Spend It On
Health Care FSA Expenses
The eligible list is broader than most people realize. Prescription drugs, doctor co-pays, lab work, X-rays, and mental health services all qualify.7Internal Revenue Service. Publication 502 – Medical and Dental Expenses So do dental cleanings, fillings, orthodontia, eyeglasses, contact lenses, and LASIK. Over-the-counter medicines like pain relievers and allergy pills no longer need a prescription to be FSA-eligible, and menstrual care products such as tampons and pads now qualify.8Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act Bandages, thermometers, pregnancy tests, and blood pressure monitors are covered as well.
Orthodontia has its own quirk because treatment often spans plan years. If you paid a lump sum in a prior year and were only partially reimbursed, you can claim the balance in the current plan year, as long as treatment is still active and you re-enroll in a health care FSA.9FSAFEDS. Orthodontia Quick Reference Guide You’ll need a payment receipt plus a letter from your provider confirming ongoing treatment.
Dependent Care FSA Expenses
The test is whether the care lets you or your spouse work or actively look for work. Daycare, nursery school, preschool tuition, babysitting, nanny costs, before- and after-school care, and summer day camps all count.3FSAFEDS. Dependent Care FSA (DCFSA) Care for an elderly parent or disabled adult dependent also qualifies if that person lives in your home and you claim them as a dependent.
A trap to watch: you can’t claim the same expenses through both a dependent care FSA and the Child and Dependent Care Tax Credit. The credit-eligible amount is reduced dollar-for-dollar by whatever you exclude through the FSA. Middle- and higher-bracket families often come out ahead with the FSA because it also erases payroll taxes; lower-income households may do better with the credit alone. Run both numbers before open enrollment closes.
The Use-It-or-Lose-It Rule
FSA funds generally expire at the end of the plan year. Anything you don’t spend is forfeited, and your employer keeps it.10Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans That’s the main downside, and the reason a conservative election usually beats an optimistic one. Employers may soften the rule with one of two options, but not both for the same account type:
- Grace period: up to two and a half extra months after the plan year ends to incur new expenses and spend the balance. Anything left after that is forfeited.10Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
- Carryover: up to $680 of unused health care FSA money can roll into the next plan year. Amounts above $680 are lost. Carryover doesn’t count against next year’s contribution cap, so you could theoretically have up to $4,080 available in a year.5FSAFEDS. New 2026 Maximum Limit Updates
Neither option is required by law. Check your plan documents. There’s also a separate run-out period, which gives you extra time after the plan year to submit claims for expenses you already incurred during the plan year. It does not let you rack up new expenses. Most plans set it at about 90 days.
Enrolling and Changing Your Election
You pick your FSA contribution during your employer’s annual open enrollment. You sign a salary reduction agreement, and the amount locks for the plan year. Estimate carefully: overshoot and you forfeit; undershoot and you pay for late-year expenses with after-tax dollars.
The IRS does allow midyear changes when a qualifying life event reshapes your situation. Marriage, divorce, the birth or adoption of a child, or a change in your spouse’s employment status all count. You have to request the change between 31 days before and 60 days after the event, and the adjustment must be consistent with what happened.11FSAFEDS. FSAFEDS Qualifying Life Event (QLE) Quick Reference Guide A new baby justifies raising your health care FSA, not cutting it.
How You Actually Use the Money
Most plans issue a debit card tied to your FSA that works at pharmacies, doctor’s offices, and other medical providers. Retailers using an Inventory Information Approval System automatically verify that a purchase qualifies, so transactions at large pharmacies and stores usually clear without paperwork.
When you pay out of pocket, you submit a reimbursement claim through your plan administrator’s portal or app. Each claim needs an itemized receipt showing date of service, provider name, and a description of the service or product. Keep receipts organized. Administrators can request documentation even for debit card purchases, and an unsubstantiated charge gets flagged for repayment. Claims are typically processed within a few business days, with reimbursement by direct deposit.12FSAFEDS. File a Claim
Some charges auto-substantiate and never require a receipt. If a charge exactly matches a co-pay under your health plan, or if you’ve already substantiated the same recurring claim, the system may approve it automatically.
What Happens If You Leave Your Job
The rules split sharply between the two account types, and the surprise usually runs in the employee’s favor for one and against for the other.
Health Care FSA at Termination
Under the uniform coverage rule, your full annual election is available from day one regardless of how much you’ve actually contributed. Elect $3,400 in January, spend $2,800 on a dental procedure in February, quit in March after contributing only $850, and you keep the $2,800. Your employer can’t recover the difference.13Internal Revenue Service. Chief Counsel Advice 201012060
Once employment ends, you can still file claims for expenses incurred before your termination date, but not for anything new. If your account is underspent at termination (contributions exceed reimbursements), your employer must offer COBRA continuation for the FSA. Electing COBRA lets you keep spending through the end of the plan year, but premiums are paid with after-tax dollars, which cancels most of the tax benefit. COBRA for an FSA really only makes sense with a meaningful unspent balance and known upcoming expenses.
Dependent Care FSA at Termination
The dependent care account doesn’t get uniform coverage. Reimbursements are capped at what you’ve actually contributed. If you leave mid-year, the remaining balance can still reimburse qualifying expenses incurred through the end of the plan year, but no new payroll deductions will be added. There’s no COBRA obligation for a dependent care account.
FSA vs. HSA
People mix these up because both hold tax-free money for medical expenses. The differences matter enough that picking wrong costs real money.
- Ownership: you own an HSA and take it with you. Your employer owns your FSA, and unused funds generally stay behind.
- Eligibility: any employee offered the benefit can enroll in an FSA regardless of health plan type. An HSA requires a high-deductible health plan with a minimum deductible of $1,700 for individual coverage or $3,400 for family coverage in 2026.10Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
- Contribution limits: the 2026 HSA limit is $4,400 for self-only coverage and $8,750 for family coverage, plus a $1,000 catch-up at age 55 or older. The health care FSA cap is $3,400 regardless of coverage level.14Internal Revenue Service. IRS Notice 2026-05
- Rollover: HSA funds never expire, roll over indefinitely, and can be invested. FSA funds expire annually, subject to the limited carryover or grace period options above.
- Using both: you generally can’t contribute to both a standard health care FSA and an HSA in the same year. A limited purpose FSA for dental and vision is the exception.4FSAFEDS. Limited Expense Health Care FSA (LEX HCFSA)
If you’re healthy, have a high-deductible plan, and want long-term savings, an HSA is almost always the better vehicle. If you have predictable medical costs and a traditional plan, the FSA gives you full-year access to your election on day one, without waiting for a balance to build.