A flexible spending account (FSA), also known as a "cafeteria" plan, enables individuals to pay for medical or dependent care expenses. There are at least 33 million employees in the U.S. who use their FSA to pay for various medical expenses.

An FSA is sponsored by many employers and allows contributions of pretax funds to the account. In 2021, an individual may contribute a maximum of $2,750. In most years, unused funds over 20% of the contribution limit are not permitted to be carried forward to the following year. This is often called the "use–it–or–lose-it" rule.

However, the Consolidated Appropriations Act of 2021 was passed in December 2020 to provide COVID–19 pandemic relief. This bill permits employers to amend FSA plans and allows an unlimited carryover of funds from 2020 to 2021 and from 2021 to 2022. Individuals are permitted to make plan changes during 2021 and 2022.

The most popular use for FSAs is for the purpose of healthcare expenses. These funds can be used to cover out–of–pocket expenses for doctors, dentists, optometrists or ophthalmologists, pharmacy prescriptions and over–the–counter medications. Many FSA accounts issue an FSA debit card or permit account holders to submit medical statements for reimbursement.

Editor's Note: The new option to carry forward an unlimited FSA balance in 2021 and 2022 is a welcome expansion of FSA benefits. Individuals who use these plans will be able to build up larger funds to protect them from potential increased medical expenses. With the increase in hospitalizations due to COVID-19, this benefit will be helpful to many individuals.