FSA planning

A Flexible Spending Account (FSA) is an employer-sponsored benefit that lets you set aside pre-tax dollars to pay for eligible healthcare or dependent care expenses. Money is deducted from your paycheck before taxes, reducing your taxable income and saving you money on every dollar contributed.

58 steps across 12 sections

1. 1. Healthcare FSA (General Purpose)

  • Covers medical, dental, vision, and prescription expenses for you, your spouse, and dependents.
  • 2026 contribution limit $3,400 per employee.
  • Full annual election is available on Day 1 of the plan year (unlike HSAs, which build up over time).
  • Subject to use-it-or-lose-it rules.
  • Cannot be combined with an HSA (if you have HDHP + HSA, you must use a Limited Purpose FSA instead).

2. 2. Dependent Care FSA (DCFSA)

  • Covers childcare, daycare, preschool, before/after school programs, summer day camp, and elder care for dependents who live with you.
  • 2026 contribution limit $7,500 per household ($3,750 if married filing separately).
  • This is a permanent increase from the previous $5,000 limit, enacted by the One Big Beautiful Bill Act — the first increase since the 1980s.
  • Eligible dependents: children under 13, or adults who are physically/mentally incapable of self-care and live with you.
  • Funds are only available as contributed (not front-loaded like healthcare FSA).

3. 3. Limited Purpose FSA (LPFSA)

  • Covers only dental and vision expenses.
  • Designed to be used alongside an HSA (since a general-purpose FSA disqualifies you from HSA contributions).
  • Same contribution limit as healthcare FSA: $3,400 in 2026.
  • Great strategy: Use LPFSA for dental/vision, keep HSA invested for long-term growth.

4. Option A: Grace Period

  • Up to 2.5 extra months after the plan year ends to incur expenses.
  • For a calendar-year plan, the grace period extends through March 15 of the following year.
  • Full remaining balance is available during the grace period.
  • Any funds unspent after the grace period are forfeited.

5. Option B: Carryover (Rollover)

  • Up to $680 (2026 limit) of unused funds carry over into the next plan year.
  • Any amount above $680 is forfeited.
  • The carryover amount does not reduce your next year's contribution limit — you can still contribute the full $3,400.

6. Key Points

  • Your employer chooses which option (if any) to offer. Some offer neither.
  • Grace period and carryover cannot be combined — it's one or the other.
  • Dependent Care FSAs can have a grace period but generally do not have a carryover option.
  • Check with your HR department or benefits administrator to know which option your plan offers.

7. Healthcare FSA Eligible Expenses

  • Doctor visit co-pays and co-insurance
  • Prescription medications
  • Over-the-counter drugs (pain relievers, allergy meds, cold medicine, digestive aids)
  • Lab tests, X-rays, imaging
  • Physical therapy, chiropractic, acupuncture
  • Mental health therapy and counseling
  • Hospital and surgical expenses
  • Ambulance services
  • Cleanings, exams, X-rays
  • Fillings, crowns, root canals

8. Dependent Care FSA Eligible Expenses

  • Daycare and childcare centers
  • Preschool and pre-kindergarten tuition
  • Before-school and after-school care programs
  • Summer day camp (not overnight camp)
  • Au pair or nanny expenses (for care, not household duties)
  • Elder care for a dependent adult living with you
  • Late pick-up fees at daycare

9. Healthcare FSA Estimation

  • Review last year's expenses: Pull EOBs (Explanation of Benefits) and receipts from the past 12 months.
  • List recurring costs: Annual physicals, dental cleanings (2x/year), eye exams, prescriptions.
  • Factor in known upcoming expenses: Planned procedures, orthodontia payments, new glasses/contacts.
  • Add a buffer for unexpected costs: Sick visits, urgent care, prescriptions for acute illness.
  • Start conservative: If this is your first FSA, aim for 70-80% of your estimated total to minimize forfeiture risk.

10. Dependent Care FSA Estimation

  • Get your provider's annual cost: Daycare, preschool, after-school programs — get exact monthly rates.
  • Multiply by months of coverage: Account for school breaks, summer camp schedules.
  • Cap at the limit: Maximum is $7,500 (2026) regardless of actual expenses.
  • Compare to the Child and Dependent Care Tax Credit: For lower-income households, the tax credit may be more valuable than the FSA. Run both calculations.

11. 2026 Changes

  • Married filing jointly: $7,500
  • Married filing separately: $3,750
  • Single or head of household: $7,500

12. How It Works

  • Elect your annual amount during open enrollment.
  • Pre-tax deductions are taken from each paycheck.
  • Submit claims with receipts for reimbursement.
  • Funds are available only as contributed (unlike healthcare FSA, where full balance is available Day 1).

Common Mistakes

  • Over-contributing and forfeiting funds
  • Forgetting to submit claims
  • Not knowing your plan's rules
  • Confusing FSA with HSA eligibility
  • Not using FSA funds before leaving a job

Pro Tips

  • Front-load healthcare FSA spending
  • Stock up before the deadline
  • Use FSA Store or similar retailers
  • Keep all receipts digitally
  • Pair LPFSA with HSA

Sources

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