What Is a Flexible Spending Account and How Does It Work?

A flexible spending account is an employer-sponsored account that lets you set aside part of your paycheck before taxes to pay for medical costs, dependent care, or both. You choose an annual amount at enrollment, your employer takes it out of your paychecks in equal installments, and you spend it on qualifying expenses during the plan year. Because the money is pulled before taxes are calculated, none of it shows up as taxable income on your W-2. The catch is that FSAs are only available through an employer whose benefits plan qualifies under Internal Revenue Code Section 125, so you can’t open one yourself the way you’d open an IRA.¹

How the Tax Savings Work

Every dollar you route into an FSA skips three taxes: federal income tax, the 6.2% Social Security tax, and the 1.45% Medicare tax. Most states also exempt the contribution from state income tax. If you’re in the 22% federal bracket and put the full $3,400 into a health care FSA in 2026, you save roughly $1,010 in federal and payroll taxes on that money alone.

Health care FSAs have one feature that makes them unusually flexible: the uniform coverage rule. Your full annual election is available to you on day one of the plan year, even though you’re only funding it a paycheck at a time.² Elect $3,400 and need surgery in January, and you can spend the whole balance immediately. Your employer covers the gap and recoups it through the rest of the year’s deductions. Dependent care FSAs don’t work this way. You can only spend what has already been deducted from your pay.

Types of FSAs and 2026 Contribution Limits

Employers can offer up to three kinds of FSA, each with its own rules and cap.

Health Care FSA

This is the standard version, covering out-of-pocket medical, dental, and vision costs your insurance doesn’t pay in full. The 2026 contribution limit is $3,400.³ If your spouse has an FSA through a separate employer, they can contribute up to $3,400 to their own account, so a household can put away $6,800 across two plans.

Dependent Care FSA

This account covers child care and elder care costs that let you go to work. Starting in 2026, the household maximum is $7,500, or $3,750 if you’re married filing separately.⁴ That’s a jump from the longstanding $5,000 cap. Unlike the health care FSA, both spouses share a single household limit regardless of how many employers offer the benefit.

Limited Purpose FSA

A limited purpose FSA reimburses only dental and vision expenses. It exists so people enrolled in a high-deductible health plan with a Health Savings Account can still use an FSA without losing HSA eligibility. The 2026 cap matches the regular health care FSA at $3,400.⁵

What You Can Spend the Money On

Health care FSAs cover co-payments, deductibles, dental cleanings, vision exams, prescription glasses, and contact lenses. Since the CARES Act, over-the-counter medications and menstrual care products qualify without a prescription.⁶ Everyday items like bandages, thermometers, and sunscreen rated SPF 15 or higher are also eligible. Health insurance premiums, long-term care costs, and anything already paid by another plan don’t qualify.⁷

Dependent care FSAs reimburse care for a qualifying individual, generally a child under 13 or a spouse or dependent who can’t care for themselves. Daycare, preschool, nursery school, before- and after-school programs, and summer day camps all qualify. Two common misreads: overnight camps don’t count even if the bill separates day and overnight portions, and tuition for kindergarten and higher grades is treated as educational, not caregiving, so it isn’t eligible.⁸

Enrolling and Changing Your Election

You can only enroll if your employer sponsors a Section 125 cafeteria plan. Self-employed individuals, business partners, and S-corporation shareholders who own more than 2% of the company are not eligible.¹ Most enrollments happen during open enrollment in the fall, and the amount you choose is locked for the plan year.

Mid-year changes are allowed only after a qualifying life event recognized by the IRS: marriage, divorce, a birth or adoption, or a change in your or your spouse’s employment. Each plan sets its own deadline for requesting the change, often 30 days and sometimes up to 60. Check your plan documents, because if you miss the window, your original election stays in place until the next open enrollment.

How You Actually Use the Money

Most plan administrators issue a debit card linked to your FSA balance. Swipe it at a pharmacy, doctor’s office, or dental clinic, and the system checks the merchant category to confirm the purchase belongs on the card. Save your itemized receipts anyway. The IRS requires every FSA expense to be substantiated with documentation showing what the service or product was, the date, and the amount you paid.⁹ Self-certification doesn’t count; you need a receipt or statement from the provider.

When the administrator can’t automatically verify a swipe, you’ll get a notice asking for documentation. Ignore it and your card gets deactivated until you clear the expense. That isn’t the administrator being difficult; the suspension is required by IRS substantiation rules.

If you’d rather pay out of pocket or don’t have a card, submit a reimbursement claim after the fact with an itemized receipt or an Explanation of Benefits from your insurer. Most administrators run a mobile app or portal for uploads, and approved claims usually land in your bank account within a few business days.

Use-It-or-Lose-It, and What Happens If You Leave

The rule that trips people up the most: money left in your FSA at the end of the plan year is forfeited. Overestimate your expenses and you lose the difference. Your employer may soften this with one of two relief options, but neither is required.⁷

A grace period gives you an extra two and a half months after the plan year ends to spend the leftover balance. On a calendar-year plan, that runs through March 15.
A carryover lets you roll up to $680 of unused health care FSA funds into the next plan year in 2026. Employers can set a lower carryover cap.³

An employer can offer one of these on a given FSA type, not both.⁷ Most plans also include a run-out period, often around 90 days after the plan year ends, to submit claims for services already received. The run-out period doesn’t extend your spending window; it only gives you time to file paperwork.

Leaving a job usually ends your health care FSA on your last day of coverage, and any balance is forfeited unless you elect COBRA to keep it open. Because the uniform coverage rule makes your full annual election available from day one, one practical move is to spend the balance before your last day if you know you’re leaving. Schedule the dental work, order the glasses, stock up on eligible supplies. If you’ve used more than you’ve contributed by the time you separate, your employer absorbs the difference and cannot ask you to repay it. Dependent care FSAs don’t offer that cushion, since only the amount already deducted from your paychecks is ever available.

FSA vs. HSA

FSAs and Health Savings Accounts both use pre-tax dollars for medical costs, and people mix them up constantly. The differences matter.

An HSA belongs to you permanently and follows you from job to job. An FSA is tied to your employer’s plan, and the balance generally ends when you leave.
HSA funds roll over indefinitely with no cap. FSA funds are subject to use-it-or-lose-it, with at most a $680 carryover for 2026.
An HSA requires enrollment in a high-deductible health plan. An FSA works with any employer-sponsored plan type.
You can invest HSA money in mutual funds and other assets. FSA money sits in a spending account.
A health care FSA gives you the full annual election on day one. HSA funds are available only as you contribute them.⁷

If you have a high-deductible plan and want both benefits, a limited purpose FSA lets you cover dental and vision through the FSA while keeping your HSA intact for everything else.⁵ That pairing is worth a close look if you’re trying to squeeze the most tax-advantaged room out of your health spending.

1
Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans
2
Internal Revenue Service. Notice 2013-71 – Modification of Use-or-Lose Rule For Health Flexible Spending Arrangements
3
FSAFEDS. New 2026 Maximum Limit Updates
4
Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs
5
FSAFEDS. Limited Expense Health Care FSA
6
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act
7
Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
8
Internal Revenue Service. Publication 503 – Child and Dependent Care Expenses
9
Internal Revenue Service. Notice 2006-69