Definition
An employer-sponsored account that lets you pay medical costs (or dependent care, in a separate version) with pre-tax dollars. You pick an annual election during open enrollment, the money comes out of each paycheck, and unspent funds are forfeited at year-end unless the plan offers a small carryover or grace period.
Why it matters
An FSA discounts predictable health spending by your tax rate, but the use-it-or-lose-it rule makes the election size the whole game. It also differs from an HSA: FSA money does not roll over year after year or follow you between jobs.
Example
An employee elects $1,200 for the year to cover glasses, copays, and a dental crown they already know is coming. At a 22% federal rate plus FICA, paying those bills pre-tax saves roughly $350, and they deliberately avoid electing more than they can predictably spend.
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.