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What is a flexible savings account?

Written on November 23, 2022 by Lori Mulligan, MPH. To give you technically accurate, evidence-based information, content published on the Everlywell blog is reviewed by credentialed professionals with expertise in medical and bioscience fields.

Table of contents

Flexible spending accounts (FSAs, also known as flexible spending arrangements) have been around since the late 1970s to address inflation and the increased cost of employer-sponsored health benefits.

Employers began instituting annual deductibles and coinsurance on their health benefits plans and/or excluding coverage for certain medical items such as vision, dental, and alternative medicine. Excluding these medical expenses effectively almost doubled the employee cost for these items on an after-tax basis [1].

So as part of the Revenue Act of 1978, FSAs were created. What is a flexible savings account? An FSA is a special account, offered by your employer, where you put money that can be used to pay for certain qualified out-of-pocket medical care costs. The incentive – you don’t pay taxes on this money.

IRS definition of qualified medical expenses

The IRS defines qualified medical expenses as:

the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. Medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They don't include expenses that are merely beneficial to general health, such as vitamins or a vacation [2].

FSA spending cap

Employees can deposit up to $3,050 of their salary per year per employer. If you’re married, your spouse can put up to $3,050 in an FSA with their employer too [3].

Eligible FSA expenses

You can use funds in your FSA to pay for certain medical and dental expenses for you, your spouse if you’re married, and your dependents.

  • You can spend FSA funds to pay deductibles and copayments, but not for insurance premiums.
  • You can spend FSA funds on prescription medications, as well as over-the-counter medicines with a doctor's prescription. Reimbursements for insulin are allowed without a prescription.
  • FSAs may also be used to cover the costs of medical equipment like crutches, supplies like bandages, and diagnostic devices like blood sugar test kits.
  • Most laboratory tests are also covered [3].

Use it or lose it provision and COVID-19 impact

Prior to COVID-19, employees had to use the funds they had put into the account or lose them by the end of the plan year unless the employer offered a limited grace period or a modest carryover of funds. Unused funds were returned to the employer.

However, when COVID-19 hit, employees were more likely to have unused health FSA amounts at the end of 2020 and 2021, so Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020 on December 27, 2020.

The law provides employers the option to amend their plans to provide greater flexibility for employees to elect and use these programs during the pandemic without risking the forfeiture of the amounts they have set aside. This law provides similar flexibility for these arrangements in 2021 and 2022 [4].

FSA pros and cons

An employer may favor offering an FSA for the following advantages:

  • FSAs give employers flexibility in designing the plans as long as they are compliant with federal laws and regulations regarding contributions, reimbursements, claims substantiation, and other administration issues.
  • Health care FSAs (HCFSAs) provide a reduction in employer payroll taxes.

However, an employer takes on the following risks when offering an FSA plan:

  • The employer is required to reimburse expenses that occur during the coverage period up to the participant’s annual election amount without regard to the participant’s account balance. If a participant terminates employment or loses eligibility, the employer cannot recoup those funds reimbursed in excess of the amount that the employee deposited to date.
  • FSAs may require more employer administration than other savings accounts.

From an employee perspective, one of the biggest advantages of participating in an FSA is the tax-free nature of the account:

  • Employee and employer contributions are not included in an employee’s gross income and qualified expenses are paid or reimbursed on a tax-free basis.
  • Aside from substantiating claims as they are incurred, a participant is not required to file any additional forms at tax time.

The following aspects of FSAs may be less favorable from the employee perspective:

  • Because FSA design and plan options vary from employer to employer, an employee needs to learn about the features of their particular FSA plan to understand how to use it correctly.
  • FSAs are subject to the use-it-or-lose-it rule unless the employer adopts a grace period or carryover provision when available. This means employees must be especially thoughtful and anticipate future medical expenses when setting annual elections [5].

Eligibility to use FSA for Everlywell products

With the above background provided about FSAs, let’s examine Everlywell products and their eligibility for FSAs. Most products, such as food allergy tests and STI tests, are likely eligible for FSA reimbursement, but it is wise to check with your FSA benefits coordinator before purchasing a product or test. For example, at-home laboratory tests are still relatively new to healthcare, so some smaller insurance providers may deny reimbursement because of a lack of familiarity with the product. Additionally, you can use FSA for the Everlywell discreet telemedicine online option.

What is a health savings account?

What does FSA/HSA eligible mean?

FSA vs. HSA: what are the differences?


  1. History of Flexible Spending Accounts. Peoplekeep. Updated June 24, 2022. Accessed November 17, 2022. URL
  2. Publication 502 Medical and Dental Expenses (2021). IRS. Accessed on November 17, 2022. URL
  3. Using Flexible Spending Accounts. Accessed November 17, 2022. URL
  4. New law provides additional flexibility for health FSAs and dependent care assistance programs. February 18, 2021. Accessed on November 17, 2021. URL
  5. Pros and Cons of Flexible Spending Accounts. International Foundation of Employee Benefits. June 25, 2020. Accessed on November 17, 2022. URL
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