Flexible Spending Account (FSA)

An employer benefit for medical costs

A flexible spending account, or FSA, lets employees set aside part of each paycheck to pay for qualified medical expenses, such as deductibles, copays, prescriptions, dental work and glasses. FSAs are offered only through employers, and the employer owns the account.

Unlike an HSA, an FSA does not require any particular health plan.

Key features

• Full amount up front: you can spend your entire annual election from the first day of the plan year, even though contributions come out of each paycheck.
• Use it or lose it: money left at the end of the year is generally forfeited, unless your employer offers a carryover amount or a grace period of up to two and a half months.
• Annual limit: set by the IRS each year.
• Not portable: if you leave the job, you usually lose access to unused funds.

Example

Ashley works part-time for a dental office while building her own bookkeeping business on the side. Her employer offers an FSA, and she elects an amount she expects to spend on her daughter's orthodontics.

• In February, the orthodontist bills her for the first stage of treatment. She pays the full amount from her FSA, even though she has only contributed two months' worth.
• She uses the rest for prescriptions and a new pair of glasses.
• By December, she has spent her election. Nothing is lost.

If she had overestimated, unused money could have been forfeited.

FSA vs HSA

• Ownership: HSA belongs to you; FSA belongs to the employer.
• Rollover: HSA funds roll over without limit; FSA funds generally do not.
• Plan requirement: HSAs require an HSA-eligible plan; FSAs do not.
• Combining: a general-purpose FSA disqualifies you from HSA contributions. A limited-purpose FSA covering only dental and vision can work alongside an HSA.

What self-employed people should know

If you are a sole proprietor, a partner or a significant S corporation shareholder, you generally cannot have an FSA for yourself through your own business. An HSA paired with a bronze or other HSA-eligible plan is usually the better fit for people who buy their own coverage.

The tax angle

FSA contributions come out of your pay before income and payroll taxes, so they reduce taxable wages rather than being claimed as a separate deduction.

Marketplace vs private plans

FSAs have nothing to do with whether your health plan is on the Marketplace or private, since they come from an employer. For people who buy their own coverage, the useful comparison is between an FSA from a side job and an HSA tied to an eligible individual plan.

Our HSA health insurance guide and our breakdown of 1099 vs W-2 health insurance explain the options. To compare HSA-eligible plans, request a quote.

General information, not tax advice — confirm with your CPA based on your specific entity structure.