What Is a Flexible Spending Account (FSA)?

A flexible spending account (FSA) is an account into which a worker can contribute pre-tax dollars to pay for qualified medical expenses, including co-pays, prescription medications, chiropractor visits, eyeglasses, and LASIK surgery (see a full list at IRS publication 502).

Key Takeaways

  • A flexible spending account (FSA) lets individuals put aside pre-tax dollars to cover qualified medical expenses.
  • Up to $500 in unused funds can rollover into the following plan year.
  • As of 2019, the IRS has established an FSA contribution limit of $2,700 per qualified FSA. 

What Is an FSA Rollover?

The U.S. Treasury Department has amended the original use-or-lose rule for FSAs to allow some funds to rollover at the end of the plan year. Up to $500 in unused funds can rollover into the following plan year. Companies can offer a grace period of up to 2.5 months for employees to use the money or carry over $500 to the next year. An employer can elect to allow less than $500 to be rolled over, but the same rollover limit must apply to all plan participants.

For example, if you elected to contribute $2,600 for a year, but only spent $2,300, you could carry over the remaining $300 to use next year. Keep in mind, if you only spent $2,000, you could still carry over $500, but you would lose the remaining $100.

Contribution Limits Versus How Much You Should Contribute

The IRS sets the FSA contribution limit, which is annually indexed to inflation. As of 2019, although that figure was $2,000, there are ways to get around that cap. For example, an individual employed by two distinct companies can contribute $2,700 under each employer’s FSA plan.

Note that a sum rolled over from a previous year does not count against the contribution limit of the next year. In addition, sums that are carried over can continue to be carried over in subsequent years.

This determines how much money one should annually allocate to an FSA account, based on the following qualified medical expenses:

  • Prescription drug co-pays
  • Dental and orthodontic expenses
  • Eye exams
  • Contact lenses and eyeglasses

To determine your FSA contribution for a year, estimate these expenses as a baseline while factoring in other potential family medical expenses.

Grace Period

The FSA grace period is a period at the end of the year, during which you can use any unspent money in your FSA. The grace period can be up to a maximum of two and a half months but may be shorter depending on the plans setup.

For instance, if your plan runs from January 1, 2019, through December 31, 2019, you would have until March 15, 2020, to use all of your FSA funds. Any unused FSA balance for the 2019 plan year would be lost after the grace period ends.

Run-Out Period

Run-out is a predetermined period during which you can file claims for the previous year. For instance, if your run-out period lasts until March 31, you would have until that time to file claims for expenses that happened before December 31. Run-out periods can vary by plan.

As an example of how a run-out period works, if you visited the dentist on November 1, but you had yet to file a claim, you could still file before March 31. Any unused funds after March 31 would be forfeited.

Get in touch with a benefits administrator or HR department to get all the grace period and run-out period details for your FSA plan.

As of 2019, the IRS has established an FSA contribution limit of $2,700 per qualified FSA.

FSAs Versus Health Savings Accounts (HSAs)

The differences between FSAs and HSAs can be confusing. Here are some clarifying distinctions:

  • An HSA is owned by an individual, while an FSA is owned by an employer.
  • Individuals may take their HSAs with them if they leave their employers, but they may not take FSAs with them, under the same circumstances.
  • An individual may invest funds in his or her HSA, but may not do so with an FSA.
  • Maximum contributions differ between HSAs and FSAs.