A Flexible Spending Account (FSA) is a tax-advantaged account that lets you set aside pre-tax dollars for specific expenses. There are three main types of FSAs:

• Health Care FSA (HCFSA) for medical expenses
• Limited Purpose FSA (LPFSA) for dental and vision expenses, often paired with an HSA
• Dependent Care FSA (DCFSA) for dependent care expenses

How FSAs work

FSAs operate on a use-it-or-lose-it basis within each plan year. You elect a contribution amount during open enrollment, and your employer deducts this amount from your paycheck in equal installments throughout the year. While the full Health FSA and Limited Purpose FSA amounts are available immediately at the start of the plan year, Dependent Care FSA funds become available as they're contributed. All FSAs provide tax savings by reducing your taxable income.

Differences

Health FSA

The Health FSA covers qualified medical, dental, and vision expenses for you and your eligible dependents. This includes copayments, deductibles, prescriptions, medical equipment, and certain over-the-counter items. The key advantage is immediate access to your full annual election amount, even before all contributions have been made. However, you cannot contribute to both an Health FSA and a Health Savings Account (HSA) in the same year.

Limited Purpose FSA

The Limited Purpose FSA is designed specifically for people who also have a Health Savings Account (HSA). It covers only qualified dental and vision expenses, allowing you to contribute to your HSA without worrying about disqualifying health coverage. Like the Health FSA, your full annual election is available at the start of the plan year. This is an excellent option for maximizing tax savings while maintaining HSA eligibility

Dependent Care FSA

The Dependent Care FSA helps pay for eligible dependent care services, including daycare, preschool, before/after school care, and adult daycare for elder dependents. Unlike health care FSAs, funds become available as they're contributed through payroll deductions. The DCFSA can provide tax savings for families with dependent care expenses, but it's important to carefully estimate your annual needs since funds don't roll over to the next year.

Navigating FSAs

Planning considerations

Here are some things you might consider when deciding what election to make:

• Review previous years' expenses to estimate future needs
• Consider anticipated medical procedures, upcoming doctors visits, or pharmacy purchases
• Estimate dependent care costs for the full plan year
• Consider your overall take home income and potential impacts to taxable income
• Remember that many FSAs are use-it-or-lose-it, and confirm your specific plan details before setting a contribution amount
• Check if your plan offers a grace period, run-out, or rollover option

To help choose which FSA is right for you, you might consider:

• If you're currently enrolled in an HSA or plan to be in the next year
• Upcoming changes to your insurance coverage
• Expected qualifying life events that may change your eligibility, such as marriage or the birth of a child

Annual contribution limits

Pre-tax benefits have specific annual contribution limits set by the IRS that are updated annually.

To confirm current contribution limits, please read more here: How much can I elect for my pre-tax benefits?