A Flexible Spending Account lets you set aside pre-tax money from your paycheck to pay for medical and dependent care costs that your insurance doesn't cover

An FSA is a savings account your employer offers where you contribute money before taxes are taken out. That money sits in the account during the plan year, and you withdraw it to pay for may be able to access medical expenses — copays, deductibles, prescriptions, dental work, vision care, and similar costs. Because the money comes out before federal income tax, Social Security tax, and Medicare tax are calculated, you pay less in taxes overall.

The account is "use it or lose it" within the plan year, meaning money you don't spend by the deadline typically cannot be carried forward. Some employers offer a grace period of up to 2.5 months into the next year, or let you roll over up to $610 (the amount changes yearly), but most do not. You decide how much to contribute during your employer's open enrollment period, usually once per year.

Key Takeaways

  • You choose how much to contribute each year during open enrollment, and that amount is deducted from your paycheck in equal installments before taxes.
  • You can only withdraw money for specific medical and dependent care expenses that your insurance plan does not cover, and you need receipts or explanation of benefits to prove the expense.
  • Money left unspent at the end of the plan year is forfeited unless your employer offers a grace period or rollover option.
  • You access the money through a debit card, reimbursement request, or direct payment to a provider, depending on how your employer's plan is set up.
  • You can change your contribution amount only during open enrollment or if you have a may have access to life event like a birth, marriage, or loss of other coverage.

How money moves in and out of your FSA

When you enroll in an FSA, you tell your employer how much to contribute for the year — for example, $2,500. Your employer divides that by the number of pay periods and deducts that amount from each paycheck before calculating your taxes. If you are paid biweekly and contribute $2,500 annually, roughly $96 comes out of each check.

To spend the money, you submit a claim. Most employers give you a debit card linked to the FSA that you can use at pharmacies, doctor's offices, and other providers. Some plans require you to pay out of pocket and then submit a receipt and claim form for reimbursement. A few let you authorize the provider to bill the FSA directly. Your employer's plan administrator — often a company like HealthEquity, WageWorks, or Conduent — processes the claim and either loads money onto the card or sends you a check.

What expenses you can and cannot pay for

The IRS maintains a list of may be able to access expenses. Common ones include copays and coinsurance, deductibles, prescription medications, dental work, vision care (including glasses and contacts), hearing aids, and over-the-counter items like pain relievers and allergy medicine (though these require a prescription or doctor's note as of 2020). Dependent care — childcare, preschool, or adult day care for an elderly parent — is also may be able to access if it allows you to work.

Ineligible expenses include health insurance premiums, cosmetic procedures, gym memberships, vitamins (unless prescribed by a doctor for a specific condition), and most over-the-counter items without a prescription. If you submit a claim for an ineligible expense, the plan administrator will deny it and you will not be reimbursed. Keep receipts and explanation of benefits statements for at least three years in case the plan asks you to prove an expense.

The "use it or lose it" rule and what happens to leftover money

Money remaining in your FSA at the end of the plan year does not roll into the next year. If you contributed $2,500 and spent only $1,800, the remaining $700 is forfeited and goes back to your employer. This is why estimating your expenses carefully during enrollment is important — contribute too much and you lose money; contribute too little and you miss the tax savings.

Some employers soften this rule. A grace period gives you an extra 2.5 months (usually through March 15) to spend money from the previous year. A rollover lets you carry forward up to $610 of unspent money into the next plan year. Check your employer's plan documents or ask your benefits administrator which option, if any, applies to you. If your employer offers both, you can use the grace period to spend the prior year's money, then roll over up to $610 of what remains.

How to estimate what to contribute

Look back at the past year and add up what you actually spent on may be able to access medical and dependent care expenses. Include copays, prescriptions, dental cleanings and work, vision exams and glasses, and childcare costs. If you have a high-deductible health plan, factor in what you expect to pay toward the deductible. If you are expecting a major expense — braces, surgery, or a new baby — add that in.

Be conservative. If you are unsure whether you will spend the money, contribute less. The tax savings from an FSA are real but modest — you save roughly 20 to 40 percent of the contribution in taxes, depending on your tax bracket. Losing $700 to the use-it-or-lose-it rule wipes out the savings on a $2,000 contribution. Many people contribute $1,000 to $2,000 annually to stay safe.

When you can change your contribution

You can change your FSA contribution amount only during your employer's open enrollment period, which is usually once per year in the fall. Outside of open enrollment, you can make changes only if you have a may have access to life event: birth or adoption of a child, marriage or divorce, death of a spouse or dependent, loss of health coverage, significant change in childcare costs, or change in your spouse's employment or benefits.

If a may have access to event happens, you typically have 30 to 60 days to notify your employer and make the change. For example, if you have a baby, you can increase your FSA contribution to cover the new dependent care costs. If you lose your job and lose access to your employer's health plan, you can decrease your FSA contribution because you will have less need for it. Contact your benefits administrator or HR department immediately when a may have access to event occurs.

FSA vs. HSA: which account to use

If your employer offers both an FSA and a Health Savings Account (HSA), they work differently. An HSA is only available if you are enrolled in a high-deductible health plan, but money rolls over year to year and you can invest it. An FSA is available with any health plan but money does not roll over. You cannot contribute to both in the same year.

If you have access to an HSA, many financial advisors suggest prioritizing it because the money is yours to keep and grows over time. An FSA makes sense if your employer does not offer an HSA, or if you have predictable medical expenses each year and want to use the money before it expires. Some people use an FSA for dependent care costs (which HSAs do not cover) and an HSA for medical expenses.

Frequently Asked Questions

What happens if I leave my job before I spend all my FSA money?

You forfeit the unspent balance. FSA money belongs to your employer, not to you, so when you leave the company the account closes. Spend what you can before your last day, or ask your benefits administrator whether you can submit claims for expenses incurred before your departure within a short window after you leave.

Can I use my FSA debit card at any store?

No. The card works only at pharmacies, medical providers, dental offices, vision centers, and other merchants that accept FSA payments. If you try to use it at a grocery store or gas station, it will be declined. Some drugstores let you buy may be able to access over-the-counter items, but the card may ask you to enter a prescription number to confirm the item is may be able to access.

Do I need a prescription to buy over-the-counter medicine with my FSA?

As of 2020, yes — you need a prescription or a doctor's note for most over-the-counter medications and medical items. Exceptions include menstrual products and insulin, which do not require a prescription. Ask your doctor to write a prescription for common items like pain relievers or allergy medicine if you plan to pay for them with your FSA.

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

Yes. You can use your FSA for medical expenses of your spouse and any dependent you claim on your taxes, even if they are not enrolled in your employer's health plan. You still need receipts showing the expense and proof that you paid for it.

What if the plan administrator denies my claim?

Ask the administrator in writing why the expense was denied and request a review. If the expense is may be able to access, the denial may be a paperwork error — a missing receipt or unclear description. If the expense is truly ineligible, you cannot be reimbursed. Some plans allow you to appeal within 30 days.