How a Flexible Spending Account works

A Flexible Spending Account (FSA) is a workplace benefit that lets you set aside money from your paycheck before taxes are taken out, then use that money to pay for medical expenses. Your employer deducts the amount you choose directly from your salary across the year, and you can withdraw from the account to cover may be able to access medical bills — copays, deductibles, prescriptions, dental work, vision care, and other out-of-pocket costs.

The main advantage is the tax savings. Because the money goes into the account before federal income tax, Social Security tax, and Medicare tax are calculated, you pay less in taxes overall. If you set aside $2,500 for the year and your combined tax rate is 25 percent, you save roughly $625 in taxes on that money.

FSAs are offered only through employers. You cannot open one on your own. Your employer chooses which FSA provider to use, and you enroll during your company's open enrollment period — usually once a year in the fall or winter. Once enrolled, the money comes out of your paycheck automatically in equal amounts throughout the year.

Key Takeaways

  • Money in an FSA comes out of your paycheck before taxes, which reduces the total taxes you owe that year.
  • You must enroll during your employer's open enrollment period, and you can only change your election if you have a may have access to life event like a birth or loss of insurance.
  • You can use FSA funds to pay for copays, deductibles, prescriptions, dental care, vision care, and other medical expenses, but not for insurance premiums or over-the-counter items without a prescription.
  • FSAs have an annual contribution limit set by the IRS, which changes each year and is lower than Health Savings Account limits.
  • Money left unspent at the end of the year is forfeited under the "use-it-or-lose-it" rule, though some employers offer a grace period or carryover option.

What expenses you can and cannot pay for with an FSA

FSA funds cover most medical costs you pay out of your own pocket. This includes copays and coinsurance (your share of the bill after insurance pays), deductibles, prescription medications, dental work like cleanings and fillings, vision care including glasses and contact lenses, hearing aids, and medical equipment like crutches or blood pressure monitors. You can also use FSA money for certain over-the-counter items, but only if you have a prescription from a doctor — for example, allergy medicine or pain relievers with a prescription.

FSA funds do not cover insurance premiums, whether for health, dental, or vision insurance. They also do not cover cosmetic procedures, gym memberships, or vitamins and supplements without a prescription. Long-term care insurance and certain other types of coverage are also off-limits. The IRS publishes a detailed list of what counts as a medical expense, and your FSA provider can tell you whether a specific item or service is covered.

Annual contribution limits and how much to set aside

The IRS sets a maximum amount you can contribute to an FSA each year. This limit changes annually and is much lower than the limit for Health Savings Accounts. For 2024, the limit is $3,200, but you should check your employer's plan documents or FSA provider website for the current year's limit, as it may differ slightly depending on your plan.

Deciding how much to set aside requires estimating your medical expenses for the coming year. Look back at what you spent on copays, prescriptions, dental visits, and vision care in the past year. If you have planned procedures or know you will need regular medications, factor those in. Be conservative — money left over at the end of the year is forfeited, so it is better to set aside less and miss out on some tax savings than to overestimate and lose money.

If your circumstances change during the year — you have a baby, lose insurance, or get married — you may be able to change your FSA election outside of open enrollment. Your employer's benefits office can tell you whether your situation qualifies as a change that allows you to adjust your contribution.

How to use your FSA and submit claims

Once your FSA is active, you receive a debit card or checkbook from your FSA provider. You can use the card to pay directly at the pharmacy, doctor's office, or other medical provider. Some providers also let you pay out of pocket and then submit a claim for reimbursement — you keep receipts and send them to the FSA administrator, who reimburses you within a few days to a week.

Not all providers accept FSA cards at the point of sale. If yours does not, you pay with your regular card or cash, then file a claim. You will need to provide a receipt showing what you paid for and proof that it is an may be able to access expense. Your FSA provider's website usually has a portal where you can upload receipts and track reimbursements.

Keep all receipts and documentation. FSA providers sometimes audit claims to make sure the expenses are legitimate and may be able to access. If you cannot produce a receipt, the provider may deny the reimbursement or ask you to repay the money.

The use-it-or-lose-it rule and carryover options

Under the "use-it-or-lose-it" rule, any money left in your FSA at the end of the calendar year is forfeited — you cannot carry it over to the next year or get it back. This is the biggest drawback of FSAs compared to Health Savings Accounts. If you set aside $2,500 and spend only $1,800, the remaining $700 is gone.

Some employers offer a grace period or limited carryover to soften this rule. A grace period typically gives you an extra 2.5 months (into March of the following year) to spend down your FSA balance. A carryover allows you to roll up to $640 of unspent funds into the next year (the carryover limit also changes annually). Not all employers offer either option, so check your plan documents or ask your benefits office what applies to your FSA.

Because of this rule, it is important to estimate conservatively. If you are unsure whether you will use the full amount, set aside less. You can always pay for some medical expenses out of pocket if your FSA runs dry.

FSAs and other health insurance plans

You can have an FSA alongside most health insurance plans, including employer coverage and marketplace plans. However, you cannot have both an FSA and a Health Savings Account (HSA) in the same year — they are mutually exclusive. If your employer offers an HSA-may be able to access high-deductible health plan, you must choose between the HSA and the FSA.

FSAs work well with traditional health insurance plans that have copays and deductibles. The FSA covers your out-of-pocket costs, and your insurance covers the rest. If you are on Medicaid or Medicare, you can still have an FSA if your employer offers one, though the rules around what counts as an may be able to access expense may differ slightly.

If you leave your job, your FSA ends. You cannot take the account with you or transfer the balance to a new employer's FSA. Any unspent money is forfeited, even if you leave mid-year. Some employers offer a continuation period (similar to COBRA for health insurance) that lets you use up your FSA balance after you leave, but this is rare.

Common mistakes and how to avoid them

The most common mistake is overestimating how much you will spend and losing money to the use-it-or-lose-it rule. To avoid this, track your medical spending for a few months before open enrollment and use that to project the full year. If your spending is unpredictable, set aside a smaller amount and accept that you will pay some medical costs out of pocket.

Another mistake is not keeping receipts or submitting claims promptly. Some FSA providers have time limits on how long after you incur an expense you can submit a claim — often 60 to 90 days. If you wait too long, the claim may be denied. Keep receipts organized and file claims as soon as you can.

A third mistake is forgetting that FSA funds are only for you and your spouse and dependents. You cannot use FSA money to pay for a friend's or parent's medical expenses, even if you help them pay. The expense must be for someone you claim as a dependent on your tax return.

Frequently Asked Questions

Can I use my FSA to pay for my spouse's or child's medical expenses?

Yes, if they are your spouse or tax dependent. You can use FSA funds to pay for their copays, prescriptions, dental work, and other may be able to access medical expenses. You cannot use FSA money for anyone else's medical costs, even if you help them pay.

What happens to my FSA if I leave my job mid-year?

Your FSA ends when you leave your job, and any unspent balance is forfeited. Some employers offer a continuation period that lets you use up your remaining balance for a few months after you leave, but this is not common. Check with your employer's benefits office about what happens to your account.

Can I change my FSA contribution during the year?

Only if you have a may have access to life event, such as a birth, marriage, divorce, loss of insurance, or significant change in medical needs. Open enrollment is the main time to change your election. Contact your employer's benefits office to see whether your situation qualifies for a mid-year change.

Is an FSA better than paying medical expenses out of pocket?

An FSA saves you money in taxes if you have regular medical expenses you would pay anyway. The tax savings depend on your income and tax rate, but can range from 20 to 40 percent of the amount you set aside. However, the use-it-or-lose-it rule means you should only set aside money you are confident you will spend.

Can I use my FSA for over-the-counter medications?

Only if you have a prescription from a doctor. Over-the-counter items like pain relievers, allergy medicine, and cold medicine are may be able to access only with a prescription. Without a prescription, they are not covered by FSA funds.