What is an FSA and how to use it before year-end

As the calendar year winds down, many of us face a familiar challenge: managing leftover Flexible Spending Account funds before they vanish. This guide will shine a light on the power of an FSA and equip you with effective tactics to maximize every dollar.

With a proactive approach, you can transform what might feel like a looming deadline into an opportunity to cover essential health and dependent care needs without extra cost.

Understanding Flexible Spending Accounts

A Flexible Spending Account (FSA) is an employer-sponsored, tax-advantaged account designed to help you pay for eligible medical, dental, vision, and dependent care expenses.

Unlike taxable savings, FSA contributions are deducted pre-tax, which can lower your taxable income by up to 30%. There are two primary varieties:

• Health Care FSA – Covers copays, deductibles, medications, vision and dental costs, some over-the-counter items and menstrual care products.
• Dependent Care FSA – Pays for child daycare, preschool, before- or after-school programs, and care for disabled dependents.

2025 Contribution Limits and Key Figures

Each year, the IRS sets contribution ceilings and rollover rules. For 2025, the limits have been adjusted to reflect rising costs and inflation pressures.

Keep in mind that some employers offer a grace period of up to 2½ months instead of a dollar rollover, but they cannot offer both features.

Navigating FSA Mechanics

Once you elect an annual contribution during open enrollment, funds are deducted evenly from each paycheck. Those dollars sit in your account, ready to be deployed when you incur qualifying expenses.

For Health Care FSAs, the full amount is available immediately at the start of the plan year, even if you’ve only contributed a fraction of it. Dependent Care FSAs, by contrast, release funds as they accumulate.

Most employers provide a debit card linked directly to your FSA, making eligible purchases simple. Retain receipts and documentation in case you need to submit them for verification.

The ‘Use It or Lose It’ Rule and Deadlines

FSAs have a reputation for being unforgiving: unused funds are forfeited when the plan year closes.

To combat this, employers might offer one of two options:

• Dollar carryover – Allows you to roll up to $660 into the next year.
• Plan-specific grace period – Provides extra months to spend unused money.

Regardless of which your employer chooses, note that most plans require all 2025 expenses to be claimed by March 31, 2026. Missing that deadline can mean losing funds you’ve worked hard to save.

Qualifying Expenses You Should Know

To harness every benefit, you need to know what expenses qualify. FSAs can cover:

• Co-pays, deductibles, prescriptions, and some over-the-counter medications.
• Dental cleanings, vision exams, eyeglasses, contact lenses, and related care.
• Menstrual care products, certain personal protective equipment, and approved first-aid supplies.
• Childcare and elder care costs for qualifying dependents, including daycare and after-school programs.

Always consult your plan policy to confirm eligibility, as definitions can vary slightly from one employer to another.

Strategic Spending Tips Before Year-End

With time running out, consider these tactics to maximize every dollar of benefits:

• Check your account balance and upcoming deadlines in your FSA portal.
• Schedule routine medical, dental, or vision appointments for yourself and dependents.
• Purchase approved OTC items like bandages, sunscreen, contact lens solutions, and menstrual supplies.
• Submit any outstanding receipts or claims promptly to ensure reimbursement.

If you’re uncertain about a purchase, review IRS Publication 502 for comprehensive guidance on eligible expenses.

Essential Considerations for FSA Participants

Participation in an FSA requires forward planning and informed decision-making:

• You must actively re-enroll each year during your employer’s open enrollment window.
• Mid-year changes are permitted only if you experience a qualifying life event (marriage, birth, or loss of coverage).
• Avoid overestimating your contributions to prevent forfeiting unused funds at year-end.

If both you and your spouse have FSAs, each account can hold the maximum allowance, potentially doubling your household benefit.

FSA vs HSA: Choosing the Right Tool

While FSAs and HSAs both offer tax advantages, they serve different needs:

• FSAs are employer-sponsored with a use it or lose it feature and lower contribution limits.
• HSAs are individually owned, portable, carry over funds indefinitely, and require a high-deductible health plan.

For individuals with predictable medical expenses and strong employer support, an FSA can provide immediate relief. Those seeking long-term savings and investment growth may find an HSA more appealing.

By understanding the nuances of each account type, you can tailor your approach to match your health needs and financial goals.

As the year draws to a close, embrace this chance to be proactive. With careful planning, timely action, and the insights shared here, you’ll convert what once felt like a looming deadline into a powerful opportunity to secure your health and financial well-being.