FSA (Flexible Spending Account)

An FSA is a pre-tax benefit account employees can use to pay for out-of-pocket medical expenses (or, with a separate dependent-care FSA, for childcare and eldercare costs). Contributions are deducted from payroll before taxes, lowering an employee’s taxable income.

The key difference from an HSA: FSA funds are generally subject to a “use it or lose it” rule within the plan year, though many employers adopt either a grace period (extra time to spend remaining funds) or a limited carryover (a capped dollar amount that rolls to the next year) — not both, and not unlimited rollover like an HSA.

No HDHP requirement: unlike an HSA, an FSA can be offered alongside any type of health plan, which makes it a flexible option for employers who don’t offer a high-deductible plan design but still want to give employees a way to save pre-tax on predictable medical costs.