Does your employer offer a flexible spending account (FSA)? And if so, are you taking full advantage of it?
If you answered “yes” to the first question but “no” to the second, you could be leaving hundreds or even thousands of dollars in tax savings on the table each year, depending on your income and expenses.
What Is a Flexible Spending Account?
A flexible spending account (FSA) allows employees to set aside money from their paychecks before taxes to pay for eligible out-of-pocket medical or dependent care expenses.
While the concept may sound complex, the process is simple:
- Each pay period, your employer withholds a set amount from your paycheck.
- Those dollars go into your FSA tax-free.
- You use the funds to pay for qualified healthcare or dependent care expenses not fully covered by insurance.
Because FSA contributions reduce your taxable income, you pay less in federal income tax, Social Security tax, and Medicare tax.
Example
If you earn $50,000 per year and contribute $3,000 to a healthcare FSA, your taxable income drops to $47,000. Depending on your tax bracket, this could translate into hundreds of dollars in annual tax savings.
2026 FSA Contribution Limits
The Internal Revenue Service (IRS) adjusts FSA limits annually to reflect inflation and rising costs. New limits apply for plan years beginning in 2026.
Healthcare FSA
- Maximum contribution: $3,400 per year (up from $3,300 in 2025)
Dependent Care FSA
- Maximum contribution: $7,500 per household
- $3,750 if married filing separately
This marks a significant increase from the long-standing $5,000 limit on dependent care FSAs and provides meaningful relief for families facing high childcare or eldercare costs.
Types of Flexible Spending Accounts
Healthcare FSAs
Healthcare FSAs can be used for a wide range of out-of-pocket medical expenses, including:
- Doctor visit co-pays and deductibles
- Prescription medications
- Medical equipment and supplies
- Vision and dental care
- Certain weight-loss programs, when medically necessary and prescribed by a doctor
Dependent Care FSAs
Dependent care FSAs help cover care expenses for qualifying dependents, such as:
- Daycare and preschool
- Before- and after-school programs
- Summer day camps
- In-home care, nannies, or adult daycare for elderly dependents
Creative Ways to Use FSA Funds
Many people underestimate how flexible FSAs can be. Depending on your plan and IRS guidelines, eligible expenses may include:
- Accessibility modifications, such as installing ramps, grab bars, or other medical accessibility improvements
- Medical travel costs, including gas mileage, tolls, parking fees, or public transportation related to medical appointments
- Childcare expenses, such as daycare, preschool, and qualifying summer camps through a dependent care FSA
Because eligible expenses can change and plan rules vary, it is always best to check with your plan administrator or review the IRS eligibility list before spending.
Understanding the Use-It-or-Lose-It Rule
FSAs do come with an important limitation. Unused funds may be forfeited if they are not spent within the allowed timeframe.
To help employees avoid losing money, employers may offer one of the following options.
Grace Period
Some plans allow you to spend leftover FSA funds for up to 2.5 months into the following year, typically through mid-March.
Carryover Option
Other plans allow you to roll over unused healthcare FSA funds into the next plan year.
- 2026 maximum carryover: $680
Employers must choose either a grace period or a carryover. They cannot offer both. Importantly, dependent care FSAs generally do not allow carryovers, meaning unused funds are forfeited.
How Common Are FSAs?
FSAs remain a valuable but underused workplace benefit. According to data from the U.S. Bureau of Labor Statistics:
- About 46% of private-sector workers have access to an FSA
- Roughly 72% of state and local government employees have access
This gap highlights why reviewing your benefits package and advocating for stronger benefits can make a meaningful financial difference.
Make the Most of Your FSA
Flexible spending accounts can significantly reduce healthcare and dependent care costs while lowering your tax bill. To maximize the benefit:
- Understand whether your plan offers a grace period or carryover
- Estimate annual healthcare and dependent care expenses carefully
- Monitor eligible expenses throughout the year to avoid forfeiting funds
FSAs are among the most powerful and often overlooked tools for managing everyday expenses tax-efficiently. With higher contribution limits in 2026, there has never been a better time to take full advantage of this benefit.