Flexible spending account

What It Means

A flexible spending account (FSA), which the IRS calls a flexible spending arrangement, is set up through your employer so you can pay many out-of-pocket medical costs with money taken from your pay before tax. HealthCare.gov lists copaysCopayA fixed dollar amount, such as $20, that you pay for a covered health care service under your health insurance plan. See more, deductibles, qualified prescription drugs, insulin and medical devices among the costs it covers. Money you don't use by the end of the plan year is generally forfeited, unless your employer offers a short grace periodCredit card grace periodThe time between a card statement and its due date when purchases collect no interest, as long as you pay the full statement balance. See more or a limited carryover.

How People Say It

• "I put $2,000 in my FSA for copays and prescriptions."
• "Use it or lose it, so I'm booking my appointments before December."
• "Does my FSA card work at the pharmacy?"

The Breakdown

Worked example. Maya elects $2,000 for 2026 and expects $1,800 of eligible costs: copays, prescriptions and part of her deductibleInsurance deductibleThe part of a covered loss you pay yourself before your home, renters or auto insurance pays the rest, set as a dollar amount or a percentage. See more. Her tax rate is an example 22%.

What the result means. Maya loses nothing, because her plan carries up to $680 into 2027. If her plan had neither a carryover nor a grace period, she'd forfeit the $200, which is why it pays to elect close to the costs you're sure of.

FSA or HSA, side by side

Good to Know

For 2026, the IRS's inflationInflationA general rise in the prices of goods and services over time, so the same amount of money buys less than it did before. See more release sets the health FSA limit on pay you set aside at $3,400 and the most a plan can let you carry over at $680; carried-over money doesn't count toward the $3,400. IRS Publication 969 explains the use-or-lose rule, and the IRS says an employer can offer either a grace period of up to two and a half months or a carryover, not both, or neither. Check your own plan's documents for which one you have and your plan year's dates, and ask a tax professional if you also have an HSA.

Related Terms and Categories

• Health savings account

  A tax-advantaged account for medical costs, open to people with an HSA-eligible health plan, where money goes in, grows and comes out for care without federal income tax.

• Dependent care FSA

  A workplace account that lets you pay for a child's or dependent's care with pretax pay so you can work; the 2026 limit is $7,500, or $3,750 married filing separately.

• Health insurance deductible

  What you pay on your own for covered health care before your health insurance plan begins sharing the cost.

• Copay

  A fixed dollar amount, such as $20, that you pay for a covered health care service under your health insurance plan.

• Take-home pay

  The money that actually reaches you from a paycheck after taxes and other deductions are taken out, also called net pay or net income.

• Tax-advantaged account

  An account the tax code rewards, such as a 401(k), IRA, HSA or 529 plan, where taxes are cut, delayed or skipped if you follow its rules.

Planning and life admin