Flexible Spending Account (FSA)

A flexible spending account, FSA, is an employer-owned account funded by payroll election and spent on qualified costs during the plan year. The health FSA caps at $3,400 for 2026 and covers Section 213(d) medical costs: deductibles, copays, prescriptions, dental, and vision. The dependent care FSA is a separate account, $5,000 per household ($2,500 for married filing separately), for childcare that lets both spouses work. Payroll deductions skip income tax and the 7.65% FICA line, a combined 29.65% saving at a 22% bracket.

The catch is ownership: the account belongs to the employer, and the balance generally forfeits at year end. Employers soften the deadline with either a 2.5-month grace period or a carryover of up to $680 in 2026, never both. Changing jobs mid-year ends the arrangement: the full-year election is generally due at once and the balance does not follow. The HSA is the no-deadline alternative, and the comparison is worth running before open enrollment.

The election is made once a year at open enrollment: you pick an annual amount and payroll deducts it in equal slices, before income tax and FICA. A $3,400 election at a 22% bracket saves 29.65% of the amount, roughly $1,000 a year, on money that was already going to deductibles and copays. The same spending paid by direct deposit owes the tax lines first, which is the discount most employees leave unclaimed.

The spending runs on the FSA debit card or on receipts filed for reimbursement, with the plan substantiating each swipe against the Section 213(d) list. The deadline is the plan year's end, softened by the employer's choice: a 2.5-month grace period or a carryover of up to $680, never both. The run-down strategy is boring and effective: December dental cleaning, January glasses order, and the balance spent before it forfeits.

The traps are structural. A job change mid-year ends the former employer's plan: the full-year election is generally due immediately, COBRA continuation is possible but rarely pencils out, and the balance does not follow. The dependent care version interacts with the dependent care credit, and the same expenses cannot fund both; claiming the same $5,000 in the FSA and the credit triggers IRS matching on the duplicate. The HSA comparison is the standing question, because a general FSA makes the reader HSA-ineligible for the year.

The FSA is the most overlooked discount in the paycheck, because the plan is opt-in at open enrollment and the deadline scares people off the account entirely. The tax saving is real: 29.65% at a 22% bracket, before the state. The forfeit is the price of ignoring the calendar, and the calendar is readable in advance.

I watched a colleague named Brent (yes, that Brent) elect $2,000 in December's open enrollment, spend $1,100 on actual medical costs, and let the remaining $900 forfeit the following December. The tax saving on the $1,100 he spent was $326; the forfeit was $900 of already-earned pretax money, and the net cost of the year was $574. The account was fine; the election was optimistic.

The highest-leverage thing most Americans can do is elect conservatively, last year's actual spending minus a margin, and schedule the run-down before the deadline. Compare the accounts with the HSA vs. health plan calculator, check the monthly arithmetic with the budget calculator, and read the no-deadline alternative in the health savings account entry.