Part 8: Stop Wasting FSA Money — The 2025 Rules Every Employee Must Know

Stop Wasting FSA Money — The 2025 Rules Every Employee Must Know

FSAs offer one of the easiest ways to save on medical expenses — but they’re also the account most taxpayers lose money on.
With strict use-or-lose deadlines, employer-specific rules, and eligibility traps that can disqualify you from an HSA, FSAs can be either a smart tax-saving tool or a costly mistake.

1️⃣ What Is an FSA?

A Flexible Spending Account (FSA) is an employer-sponsored plan allowing you to set aside pre-tax dollars to pay for eligible expenses.
FSAs reduce your:

• Federal income tax
• State income tax (in most states)
• Social Security & Medicare tax (FICA)

Unlike HSAs, FSAs do not belong to you — they belong to your employer.
Most unused funds are forfeited unless the employer offers a carryover or a grace period.

2️⃣ Types of FSAs (Medical, Limited, Dependent Care)

There are three main types of FSAs:

🔹 Medical FSA

Covers a wide range of qualified medical expenses.
However, having a general-purpose medical FSA usually makes you ineligible for HSA contributions.

🔹 Limited-Purpose FSA (LPFSA)

Covers only:

• Dental
• Vision
• Preventive care (in some plans)

A Limited FSA is designed to be **HSA-compatible**, allowing you to use an LPFSA and still contribute to an HSA.

🔹 Dependent Care FSA (DCFSA)

Covers eligible dependent care costs, such as:

• Daycare
• After-school programs
• Adult day care

Dependent Care FSAs have their own annual IRS limits separate from medical FSAs.

3️⃣ The Use-or-Lose Rule, Grace Period & Carryover

FSAs are famous — or infamous — for the use-or-lose rule.
This means unused funds are forfeited unless your employer chooses one of two optional features:

• Grace Period: Up to 2.5 extra months to spend remaining funds
• Carryover: You can carry over up to a capped IRS amount into the next year

Employers may offer one of these — **but not both**.
And some employers offer neither.

4️⃣ How FSAs Affect HSA Eligibility

One of the biggest taxpayer mistakes is enrolling in an FSA without realizing it cancels HSA eligibility.

General medical FSA → HSA is NOT allowed.

However, the following plans do allow HSA contributions:

• Limited-purpose FSA (dental/vision only)
• Post-deductible FSA (pays expenses only after HDHP deductible)
• Sit-out or suspended HRA/FSA options where general medical reimbursement is waived for the year

5️⃣ What Counts as a Qualified FSA Expense?

Medical FSA expenses follow the same general rules as HSAs:

• Doctor visits
• Diagnostic tests
• Hospital services
• Prescription medications
• Dental & vision care
• Mental health care
• Medical equipment (e.g., CPAP, blood pressure monitors)

Cosmetic procedures and non-medical wellness items usually do not qualify unless medically necessary.

6️⃣ Real-Life Examples (Smart vs Risky Use)

💬 Frequently Asked Questions