Most Employees Miss This 30% Tax Break: How a Flexible Spending Account Can Save You Nearly $900 in 2025

Healthcare costs are up. Inflation is up. Yet many employees leave money on the table because they skip a Flexible Spending Account. Many don’t understand what it is or are intimidated about how to use it.  If you use an FSA the right way, you will lower taxable income and keep more cash in your pocket.

What an FSA is

A Flexible Spending Account lets you set aside pre-tax dollars for qualified expenses. There are two common types:

• Health FSA for medical, dental, and vision costs.

• Dependent Care FSA for childcare and similar care expenses.

FSAs are employer plans. You elect an amount during open enrollment. Contributions come out of your payroll through the year in even installments. The account is owned by the employer, but you control how funds are spent within plan rules.

Important difference: an FSA is not an HSA or an HRA.

How funding and access work

• You choose your annual election during open enrollment for the next calendar year.

• Your employer deducts contributions each paycheck.

• The full year’s election is available to spend in January, even though you have not contributed it yet.

• FSAs are not portable. If you leave your job, any unused balance generally reverts to the employer. On the flip side, if you used the full election early in the year and then leave, the employer cannot claw back the difference.

2025 contribution limits

• Health FSA: up to $3,200 per employee.

• Dependent Care FSA (DCFSA): $5,000 per household, or $2,500 if single or married filing separately.

Carryovers and grace periods

These features are optional and vary by employer. Know your plan’s rules.

• Carryover: Plans may allow unused funds to carry into the next plan year, up to $640 for 2025. Your employer can allow any amount up to that cap or none at all.

• Grace period: Some plans use a 2.5 month grace period instead. If your plan year ends December 31, you can incur eligible expenses through March 15. Filing deadlines often land between March 31 and April 30.

You cannot have both a carryover and a grace period for the same health FSA plan year. Your plan will specify which applies.

The tax savings

FSA contributions reduce federal income tax, Social Security tax, and Medicare tax. Example: Elect $3,000. Assume a 22% federal bracket, 6.2% Social Security, and 1.45% Medicare. Combined rate about 29.65%. This would result in an annual tax savings: ~$889, or about $74 per month. Your exact savings depend on your tax situation and state taxes.

Lower taxable wages also reduce Adjusted Gross Income, which can improve eligibility for benefits and credits such as FAFSA calculations, the American Opportunity Tax Credit, and the Child and Dependent Care Credit.

What qualifies

Typical health FSA eligible expenses include:

• Deductibles and copays

• Prescription drugs

• Dental and orthodontia

• Vision exams, glasses, contacts

• Over-the-counter medicines and some medical supplies and equipment

What does not qualify: insurance premiums.

Dependent Care FSA examples:

• Daycare, preschool, after-school care

• Summer day camps

• In-home childcare when properly documented

For full lists, see IRS guidance such as Publication 502 for medical expenses and your plan’s eligible item list.

The big gotcha

FSAs follow a use-it-or-lose-it rule. Unused funds at the end of your plan’s period are forfeited unless saved by an allowed carryover or spent during a grace period. This is why planning matters.

If you leave your employer mid-year, you generally lose any remaining balance. Conversely, if you used the full health FSA election early and depart, the employer cannot recover the difference from you.

How to plan your election

Aim to slightly underestimate. You want to use every dollar without risking forfeiture.

• Review last year’s medical, dental, and vision costs.

• Add known recurring items for next year, like contact lenses or routine prescriptions.

• Factor your plan deductible and expected copays.

• If your plan offers carryover up to $640, you have a buffer.

Action checklist for open enrollment

1. Confirm whether your plan uses a carryover or a grace period and note the claim filing deadline.

2. Total last year’s out-of-pocket healthcare costs. Add known expenses for next year.

3. Choose a conservative election that you are confident you will use.

4. Enroll during open enrollment so payroll deductions start in January. Remember that health FSA funds are available to spend up front.

5. Keep receipts. Submit claims on time. Track your balance monthly.

6. If you expect to leave your employer, time your reimbursements and make sure you have used eligible funds beforehand.

Bottom line

Used correctly, a health FSA can save close to $900 a year for many households. The key is to know your plan’s rules, estimate carefully, and follow through on claims. For families and for veterans moving into civilian roles where FSAs are new, this is a straightforward win during open enrollment.

To learn more, check out the video: https://youtu.be/4wG5qLXwrN4

To learn more about High Flight Financial and my services, https://www.highflightfinancial.biz/

Disclaimer: This post is for informational purposes only and should not be considered tax, legal, or financial advice. Always review your specific plan documents and consult a qualified professional or tax advisor before making benefit or contribution decisions.