Flexible Spending Accounts (FSAs) can be a powerful tax-saving tool for covering healthcare and dependent care costs. But they only work to your advantage if you understand how they operate. Many business owners and employees miss out on valuable benefits because the rules seem confusing or overly technical.
FSAs let you set aside pre-tax dollars to pay for certain expenses you are likely already covering out of pocket. When used correctly, they reduce your taxable income and increase your take-home pay. But to get the most out of them, you need to understand which costs are eligible, how your employer’s plan is set up, and what deadlines or restrictions may apply.
This article walks you through the basics of FSAs. It outlines what counts as a qualified expense and offers practical ways to avoid common mistakes. Whether you are just getting started or looking to use your FSA more effectively this year, this guide will help you feel more confident managing your benefits.
What is a Flexible Spending Account, and how does it help my finances?
A Flexible Spending Account (FSA) lets you set aside a portion of your paycheck before taxes are taken out. You can then use that money to pay for specific out-of-pocket expenses, like medical bills or dependent care, without paying tax on those funds.
Since FSAs reduce your taxable income, they can directly increase your take-home pay. That makes them a smart way to stretch your dollars, especially if you are already paying for these types of expenses throughout the year.
FSAs are only available through your employer, so you must be enrolled in a workplace plan to participate. There are two primary types:
- Healthcare FSA: Covers medical, dental, and vision costs not fully paid by insurance.
- Dependent Care FSA: Reimburses you for childcare or care for dependents who cannot care for themselves while you work.
Knowing which account you have—and how it works—can help you use it more effectively and avoid leaving money on the table.
How do Healthcare FSAs and Dependent Care FSAs differ?
They may share the same acronym, but these two accounts cover very different needs.
Healthcare FSAs
These cover out-of-pocket medical, dental, and vision expenses that your insurance doesn’t fully pay. That includes copays, deductibles, prescription medications, glasses, dental cleanings, and more. Coverage often extends to your spouse and dependents.
Dependent Care FSAs
These help you and your spouse work or attend school by reimbursing:
- Childcare for kids under 13, such as daycare, before- and after-school care, and summer day camps (not overnight)
- Wages for in-home providers like babysitters, nannies, and au pairs
- Adult day care for dependent adults who cannot care for themselves
Knowing which FSA you have, and what it covers, helps you avoid disallowed expenses and make full use of your benefits.
Which medical, dental, and vision expenses can I actually pay for with a Healthcare FSA?
Healthcare FSAs can cover a lot more than most people realize. These accounts are designed to offset out-of-pocket healthcare costs that your insurance does not fully cover. Here is a breakdown of what typically qualifies:
Medical
Copays, deductibles, prescription medications, certain over-the-counter items, approved medical equipment (like crutches or blood pressure monitors), and mental health counseling.
Dental
Exams, cleanings, fillings, crowns, and even some orthodontic treatments such as braces or retainers.
Vision
Eye exams, prescription glasses, contact lenses and their supplies, and procedures like LASIK.
Preventive care
Vaccines, flu shots, and common health screenings are usually eligible as well.
If a medical expense is necessary for your health and not fully paid by insurance, there is a good chance it qualifies under a Healthcare FSA.
What about over-the-counter (OTC) products? What changed?
Thanks to recent updates in the law, you no longer need a prescription for many OTC items to be FSA-eligible. Here’s a snapshot of what you can now buy with your Healthcare FSA:
- Pain relievers (Advil, Tylenol)
- Cold, allergy, and flu meds
- Antacids and digestive aids
- First-aid supplies (bandages, thermometers, antiseptics)
- Menstrual care products (pads, tampons, menstrual cups)
The eligible product list continues to evolve, so check your FSA provider’s website or app to stay up to date.
If I have a Dependent Care FSA, what expenses get reimbursed?
If you’re paying someone to watch your kids or care for an adult dependent so you can work, that expense may be eligible. Common examples include:
- Childcare: Daycare centers, nursery school, before- and after-school care, and summer day camps.
- In-home care: Babysitters, nannies, and au pairs (including their wages and taxes).
- Adult care: Day programs for elderly parents or disabled dependents who can’t care for themselves.
A good rule of thumb: care must be essential for you to work or attend school, and the provider can’t be your spouse or an underage relative.
What about less common or “gray area” expenses?
Some expenses seem like they should count—things like supplements, massages, or specialty services—but not everything is clearly defined. When you’re unsure, the best move is to double-check before spending.
Start with:
- Your FSA administrator’s site or app – Most have searchable lists of eligible expenses.
- IRS Publication 502 – A helpful guide, though not always definitive.
- Your employer’s plan documents – These can be stricter than IRS rules.
If something feels like it’s in a gray area, it probably is. That doesn’t mean it’s ineligible, but you’ll want to confirm before using your FSA card.
Can my employer’s FSA rules change what’s covered?
Yes. This is where most surprises come from. While all FSAs follow IRS rules, your employer controls some of the finer points.
They might:
- Set contribution limits below the IRS maximum
- Decide whether unused funds carry over or expire
- Define how long you have to submit claims
These plan-specific rules can seriously affect how much you save. Always check your Summary Plan Description or ask HR to avoid losing money due to missed deadlines or misunderstood rules.
How do I avoid losing FSA funds at the end of the year?
You’ve probably heard the phrase “use it or lose it,” and when it comes to FSAs that’s not just a saying—it’s a real risk. Most FSA funds expire at the end of your plan year unless your employer offers a carryover or grace period. If you don’t use the money in time, it goes back to your employer instead of your pocket. That’s why it’s so important to plan ahead and spend your balance on eligible expenses before it disappears.
Here’s how to make sure you don’t leave money on the table:
- Estimate wisely: Look at last year’s healthcare or childcare expenses to guide your contributions.
- Stay organized: Save receipts and documentation in case you’re asked to verify a claim.
- Watch deadlines: Most FSAs have strict cutoff dates for submitting expenses.
- Use digital tools: Mobile apps, online FSA stores, and submission portals can simplify everything.
A little planning early in the year helps you avoid stress and wasted savings at the end of it.
What should I do if I have questions about my FSA?
If something’s unclear, ask. Your FSA administrator or HR team is there to help you understand how your plan works and what you can use it for. And really, there’s no such thing as a dumb question when your money’s on the line. If you’re unsure about whether something’s covered or how to file a claim, speak up early. A quick question could save you hundreds later.
Key Takeaways
- Know your FSA type(s): Healthcare and Dependent Care FSAs serve different purposes.
- Track the details: Employer rules, contribution limits, and deadlines matter.
- Keep good records: Receipts and documentation can make or break your claim.
- Use your resources: Lean on HR, plan documents, and online tools to stay informed.
- Ask when unsure: Better safe (and reimbursed) than sorry.
The bottom line
Understanding your FSA puts you in control. With a little planning, you can use pre-tax dollars to cover real-life costs, like prescriptions, dental care, or summer childcare, without leaving money on the table.
Now’s a good time to review your plan, estimate your expenses, and make sure you’re meeting the deadlines that matter. And if you’re unsure what qualifies or how to make the most of your account, don’t guess—ask.
DiMercurio Advisors is here to help.
We’ll walk you through your FSA details, answer your questions, and show you how to make the most of every tax-saving opportunity. Schedule a free call with us today.
