What is an FSA?
A health Flexible Spending Arrangement (FSA) is an employer-sponsored account offered through a Section 125 cafeteria plan. Employees set aside part of their pay before taxes to cover out-of-pocket medical, dental and vision costs such as deductibles, copays, prescriptions, glasses and contacts.
The full annual election is generally available on the first day of the plan year, even though employees fund it through payroll deductions over the year.
Who qualifies for an FSA?
Any employee who is eligible under their employer’s cafeteria plan can enroll. Unlike an HSA, a health FSA does not require a high deductible health plan. Self-employed individuals, partners, LLC members (in most cases) and more-than-2% S corporation owners generally cannot participate. Employers of any size can sponsor a health FSA, but they need a written Section 125 plan document.
2026 health FSA limits
- Employee salary-reduction limit: $3,400 per employee (2026 plan years)
- Maximum carryover of unused funds, if the plan allows it: $680 (2026)
Employers may set lower limits. Each spouse with access to their own employer’s FSA has a separate limit. Source: IRS Rev. Proc. 2025-32, section 3.15.
Use-or-lose, carryover and grace period
Health FSA money is generally use-or-lose by the end of the plan year. A plan may offer one of two exceptions: a carryover of up to $680 (2026) into the next plan year, or a grace period of up to 2½ months to spend leftover funds. Plans cannot offer both.
FSA vs. HSA: what’s the difference?
- Health plan requirement: a health FSA works with any health plan. An HSA requires a high deductible health plan.
- Ownership: the FSA belongs to the employer’s plan. The employee owns an HSA.
- Rollover: FSA money is mostly use-or-lose. HSA money rolls over with no cap.
- Limits: health FSA $3,400 per employee (2026). HSA $4,400 self-only / $8,750 family (2026).
- Access to funds: the full FSA election is available from day one. HSA spending is limited to the balance already contributed.
Learn more on our What is an HSA? page.
FSA frequently asked questions
What can I pay for with an FSA?
Qualified medical expenses not covered by insurance, such as deductibles, copays, prescriptions, dental work, eyeglasses and contacts, and many over-the-counter items.
What happens to my FSA if I leave my job?
Coverage usually ends on your last day unless you elect COBRA continuation where available. Claims must be for expenses incurred while covered.
Can I change my FSA election mid-year?
Generally only after a qualifying life event, such as marriage, birth or adoption, or a change in employment status.
Is a dependent care FSA the same thing?
No. A dependent care FSA covers child or adult day care, not medical costs, and has its own separate limit.
What is a limited-purpose FSA?
A health FSA limited to dental and vision expenses. It can be paired with an HSA.
How CBIS helps
CBIS works with outside account administrators to help employers set up employee benefits that can include a health FSA, along with the Section 125 Health FSA plan document the IRS requires. Call (858) 283-7575 or email [email protected].
Related Section 125 pages: Section 125 plans · What is a Section 125 premium only plan? · Section 125 plan: a fit for small employers · Section 125 Health FSA plan document
This page is general education, not tax or legal advice. Limits change every year; confirm current figures with IRS guidance or a tax professional.