Flexible Spending Accounts (FSAs) let employees pay for certain expenses with pre-tax dollars. Healthcare FSAs cover medical, dental, and vision expenses. Dependent care FSAs cover childcare and elder care. The tax savings can be substantial, though use-it-or-lose-it rules apply.
Healthcare FSA
Healthcare FSAs reimburse eligible medical expenses not covered by insurance. This includes copays, deductibles, prescription costs, dental work, vision care, and certain over-the-counter items. Annual contribution limits are set by the IRS.
Dependent Care FSA
Dependent care FSAs cover work-related childcare for children under 13 and care for disabled dependents. Eligible expenses include daycare, preschool, after-school programs, and elder care. This FSA has separate limits from healthcare FSA.
Use-It-or-Lose-It
FSA funds generally must be used within the plan year or they are forfeited. Plans may offer either a grace period extending into the following year or limited rollover of unused healthcare FSA funds. Careful planning helps avoid losing money.