What Is an FSA Plan?

A Flexible Spending Account, or FSA, is an employer-sponsored benefit that lets employees set aside pre-tax dollars for certain healthcare or dependent care expenses. Because the money comes out of pay before federal income and payroll taxes are calculated, an FSA can lower taxable income while helping employees plan for costs they expect during the year.

Employers may offer healthcare, limited-purpose, or dependent care FSAs, each with different rules for how the funds can be used.

How Does a Flexible Spending Account Work?

Employees usually choose how much to contribute during open enrollment, and that annual amount is divided among payroll deductions throughout the plan year. Employers may contribute to an employee’s FSA too, although they are not required to do so.

With a healthcare FSA, the full annual amount elected for the year is typically available during the coverage period even before all of that money has been deducted from paychecks. An employee who has a larger qualified expense early in the year may therefore have access to more than has been contributed through payroll at that point.

Access to the money depends on the plan. Some employees receive an FSA debit card for eligible purchases, while others pay out of pocket and submit a claim for reimbursement. Receipts or other documentation may still be required to verify the expense.
Once an FSA election is made, it usually remains in place for the plan year. Certain qualifying life events may allow a change if federal rules and the employer’s plan permit it.

Who Can Use an FSA?

Because an FSA is an employer-sponsored benefit, employees usually gain access through work rather than opening an account independently. The employer’s benefit terms determine who may participate and which types of FSAs are offered.

Enrollment in the employer’s health insurance plan is not always required to participate in a healthcare FSA. Workers can review enrollment materials to see which options are available and whether they qualify.

Types of Flexible Spending Accounts

FSA options differ according to the expenses they cover and how employees can use the money.

Health Care FSA

A healthcare FSA can pay or reimburse qualified medical expenses for an employee and certain qualifying family members. These accounts offer broad coverage for healthcare spending and can help with many out-of-pocket costs that are not paid by insurance.

Limited-Purpose FSA

A limited-purpose FSA has narrower coverage, usually focusing on qualifying dental and vision expenses. Because of that limited scope, it can often be used alongside an HSA-compatible health plan. This can give employees a way to set aside pre-tax dollars for those specific costs while maintaining HSA eligibility.

Dependent Care FSA

A dependent care FSA helps pay qualifying care expenses that allow an employee, and a spouse when applicable, to work or look for work. That can include childcare for a qualifying child or care for certain dependent adults.

Reimbursements are usually limited to the amount already contributed to the account, so someone using one for regular care costs may need to consider when payroll deductions reach the account. Unlike a healthcare FSA, this account is intended for qualifying care costs rather than medical treatment.

What Expenses Can FSA Funds Cover?

For a healthcare FSA, qualified medical expenses must meet IRS rules and the terms of the employer’s plan. Common costs that may qualify include copays, deductibles, prescription drugs, dental treatment, vision care, and certain medical supplies.

Health-related purchases do not automatically qualify for reimbursement, and some require supporting documentation before reimbursement or after an FSA debit card is used. Keeping receipts and checking with the FSA administrator when eligibility is uncertain can help prevent a claim from being delayed or denied.

FSA Contribution Limits and Unused Funds

For 2026, the healthcare FSA salary-reduction limit is $3,400. The dependent care FSA limit is generally $7,500 for 2026, subject to applicable federal rules.

Choosing a contribution amount takes some planning because healthcare FSAs usually follow a use-it-or-lose-it rule. Someone with regular prescription costs, recurring copays, or planned dental work may have an easier time estimating expenses than someone whose costs vary more from year to year.

Money left in the account at the end of the plan year may be forfeited unless the employer offers an allowed carryover or grace period. For 2026, an employer may permit up to $680 of unused healthcare FSA funds to carry into the following year. The employer may instead offer a grace period that gives employees additional time to incur qualifying expenses, making it important to review plan deadlines and year-end rules before choosing a contribution amount.

FSA vs. HSA

FSAs and HSAs both provide tax advantages for healthcare spending, but the accounts are structured differently. An FSA comes through an employer, while an HSA belongs to the individual. That difference affects what happens to the money over time: HSA balances can stay in the account from year to year, while FSA funds are subject to the employer plan’s year-end rules.

HSA eligibility usually requires qualifying high-deductible health coverage. FSA type can affect eligibility as well, since general-purpose coverage can prevent someone from contributing to an HSA, while a limited-purpose FSA can often work alongside one.

Which is better, an HSA or FSA, depends partly on the benefits available through the employer and the employee’s health coverage. Eligibility, ownership, contribution rules, and treatment of unused funds can all affect which account fits a particular situation.

Is an FSA Plan Worth It?

An FSA can be useful for employees who regularly pay qualifying healthcare or dependent care expenses. Using pre-tax dollars can reduce taxable income while giving those expected costs a dedicated place in the household budget. The benefit tends to be greater when an employee has a reasonable sense of what they will spend during the year and understands the plan’s rules for unused funds.

Offering FSA Benefits Through Selected Benefits

For Texas employers, an FSA can be part of a broader employee benefits package alongside health coverage and other options. HR teams may need to consider how the account works with available plans, which employees are likely to use it, and what information workers will need during enrollment.

Selected Benefits can help Texas businesses compare health insurance plans and related benefit options while considering costs, coverage, and plan design. Contact Selected Benefits to discuss employee benefit options and FSA-compatible plan structures for your Texas business.