The problem with FSAs
A flexible spending account lets you set aside pre-tax money for medical or dependent care costs, saving federal income tax, usually state income tax and 7.65% payroll tax. The catch is the “use it or lose it” rule: you choose the amount once a year, and money you do not spend may be forfeited. The employer can allow either a limited carryover of unused funds (up to $680 for 2026 plans, indexed each year) or a grace period of up to 2 and a half months, but not both, and many plans offer neither. A health FSA also differs from an HSA because the full annual election is available to you on the first day of the plan year, even before you have contributed it.
How the suggestion is computed
The calculator suggests an election equal to your certain expenses, plus 50% of those that are likely and 10% of those possible, rounded down to $10 and capped at the plan’s limit. The weights are a rule of thumb: you should be nearly sure to spend what you elect, and the small extra amount captures the chance that likely costs do happen. The break-even logic shows why caution makes sense. If your combined tax rate is 33.65% (for example 22% federal, 4% state and 7.65% payroll tax), every dollar you actually spend saves you about 34 cents, but every dollar you elect and do not spend is lost, with only the tax saved on it as a partial offset. You would need to spend about 66% of an election just to break even; if your plan has a $680 carryover, the cost is limited to the part above it.
What counts as eligible
Eligible health FSA expenses include deductibles, copays and coinsurance, prescriptions, dental care and orthodontia, vision care including glasses, contacts and LASIK, and many over-the-counter items such as pain relievers, bandages and first-aid supplies, and menstrual care products. Items that are only for general health, such as vitamins taken for general wellness, are not eligible unless a doctor documents a specific medical condition. Premiums are not eligible. A dependent care FSA pays for the care of a child under 13 or an incapacitated dependent so that you (and your spouse) can work, such as daycare, preschool, before and after-school programs and summer day camp (not overnight camp). From 2026 the federal limit is $7,500 per household, or $3,750 if married filing separately, up from $5,000.
Dependent care FSA versus the tax credit
You cannot use the same expenses for both the dependent care FSA and the Child and Dependent Care Credit. Higher earners usually save more with the FSA because the credit rate falls to 20% at higher incomes and the expense cap for the credit is only $3,000 for one child and $6,000 for two or more. The calculator shows only the FSA saving, so check the credit on IRS Form 2441 if your income is modest.
Do the planning once, then use the money
- Review last year’s receipts and Explanations of Benefits and list what recurs.
- Check the plan’s deadline to submit claims; many plans allow 90 days after year-end.
- If you have an HSA-eligible plan, ask whether you can have a limited-purpose FSA that covers dental and vision only.
- If you change jobs, your health FSA generally ends unless you elect COBRA; spend or submit claims first.