Setting Up a Flexible Spending Account

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Setting Up a Flexible Spending Account

Setting up a flexible spending account is easy. See your human resources department at work, which can provide you with the forms necessary to enroll. Your employer contracts with an insurance company, bank, or other FSA administrator who will actually administer the account, holding the funds you designate and providing you with either a debit card or reimbursement upon receiving receipts for qualified expenses. Your employer may offer both types of flexible spending accounts—health care and dependent care—or only one. If both are offered, you may set up accounts for each type of expense.

You must do some homework

If you haven’t had an FSA before, you need to estimate how much to contribute, because your employer will need you to designate an amount that you want deducted from your pre-tax pay this year. It’s better to be conservative the first year you contribute, because FSAs have a use-it-or-lose-it feature, whereby if you don’t use the money within the year it is contributed—or during a short grace period afterward if offered by your employer—you lose the money. For the healthcare flexible spending account, the first $660 is exempt from this rule (for 2025) and you may carry over this amount if allowed by your employer. When deciding how much to contribute to a healthcare FSA, take a look at your medical expenses for the past year, which should give you a good idea of how much you are likely to spend. If you anticipate large expenses coming up in the current year, such as orthodontic expenses for a child or new prescription glasses for yourself or your spouse, you might want to allocate a higher amount to your healthcare flexible spending account. In the case of a dependent care FSA, consider how many children you will have in daycare in a given year, whether they will be receiving childcare full-time or part-time, and whether there are any circumstances under which alternative childcare would be available—from a relative, for example—that would be less expensive.

If you roll over the $660 maximum into a non-limited healthcare flexible spending account the next year, you will be barred from participating in a health savings account (HSA) in that next year. This is to ensure that your rolled over funds get used. However, those who have HSAs should take notice of the rule.

The contribution limits

There is a contribution limit of $3,300 per year for health FSAs.

For a dependent care FSA, the IRS allows you to contribute up to $5,000 a year if you are married and filing a joint return or if you are a single parent; or $2,500 per year if you are married and filing separately. If you enroll in and use funds from a dependent care FSA, you must file IRS Form 2441 when filing your income taxes.

You may have some reimbursement options

If your health care FSA plan administrator offers options in terms of reimbursement, choose the method that is the most convenient for you. Typical options include debit cards, credit cards, and stored value cards as well as a traditional reimbursement account. Typically, debit, credit, and stored value cards are more convenient than traditional reimbursement accounts because they are set up with documentation systems that meet IRS standards, so you generally don’t have to provide receipts to your FSA administrator to document your expenses. With a traditional reimbursement account, you must provide receipts to your FSA administrator before you can receive funds from your account.