Flexible Spending Accounts and Dependent Care FSAs Explained

Flexible Spending Accounts & Dependent Care Accounts

There are several different types of FSA accounts that might be available through your employer.

Healthcare FSA: Can be used on eligible medical expenses using pre-tax dollars.

Limited Purpose Healthcare FSA: Can be used on eligible dental and vision expenses.

Dependent Care FSA: Can be used for qualifying dependent care expenses such as childcare, preschool, summer day camps, and before/after school programs.

The benefit is, rather than paying for any of these expenses from your normal bank account, paying them from the above accounts exempts you from paying BOTH FICA tax ~7% + federal income tax on the contributions made.

For example, let's say in 2026 you spend: $7,500 on child care $3,400 on health care costs not covered by insurance *These also are the max limits you can contribute to each plan.

At the top tax bracket, this would save you around $4,000 in taxes.

Health Care FSA Deeper Dive:

Exclusions: Cannot be used to pay for health insurance premiums, long term care expenses, or costs that are covered by another plan. Any expenses reimbursed by the FSA cannot be claimed as tax deductions.

Use it or lose it: Plans can offer either a grace period after the end of the year of up to 2.5 months, or allow a rollover of a portion of the unused funds to the following year. A plan cannot offer both these options simultaneously.

Dependent Care FSA Deeper Dive:

Exclusions: They cannot be used for education such as tutoring, kindergarten or higher grade expenses, overnight camps, or household services not related to care.

Use it or lose it: There are no rollover of unused funds, however employers may offer a 2.5 month grace period after the end of the year for the funds to be utilized.

How to determine how much to contribute:

For healthcare FSAs, estimate how much you typically spend on medical expenses such as co-pays, doctor visits, prescriptions, and be conservative. Let's say you anticipate spending $2,000 - $3,000 + your Employer allows $600 to be rolled into the next year. In this case, we would suggest contributing $2,600 to the FSA plan.

For Dependent Care FSAs - it should be more straightforward as you know the cost of care in advance where medical expenses can be more unpredictable.

If you are finding you have unused funds you can accelerate medical treatments, purchase prescription refills or buy supplies such as first aid kits, sunscreen, or orthopedic supports.

A Few Requests

Personally this has been a difficult year but also a year full of blessing. On the same day my sister-in-law brought home her twins from the hospital, we lost my mother-in-law. A little over 1 month later my wife and I welcomed our 4th child and 1st son. Not long after that we found out my Dad has Leukemia. We believe he is in good hands at UTSW, but if there are any Doctors reading this who have expertise in this area feel free to reach out. And anyone else we would appreciate your prayers.

Professionally, this year has been very rewarding. I obtained the Tax Planning Certified Professional designation, the business experienced 37% growth, and the investment company I partner with crossed over $500 billion of investments managed. I feel truly blessed to have found this career in 2012 and where it has led.

I would love to help someone you know who may not have the funds to work with a Financial Advisor at no cost. This isn't a ploy to turn them into a client, I would simply like to help in any way I can with something as simple as answering some questions they may have.

On another note, we are taking on new clients that are a good fit. A good rule of thumb is if you are a current client and you have someone who is in the same profession, similar situation, or they have similar values to you, those are typically good fits.

Lastly, there are nearly 1,000 people on this newsletter. Which means over 90% of you are not clients. I have had several people over the years tell me they have been reading my newsletter for years and finally decided to reach out and now we are helping them. Perhaps this is the year you take that next step and get a second opinion. We would welcome it.