An FSA is a tax-advantaged savings account for medical and dependent care costs

A Flexible Spending Account (FSA) is an account your employer offers that lets you set aside pre-tax money to pay for medical expenses or dependent care. The money comes out of your paycheck before taxes are calculated, which lowers your taxable income for the year. You decide how much to contribute each year during your employer's open enrollment period, and you can only change that amount if your life circumstances change — you cannot adjust it whenever you want.

FSAs come in two types: a medical FSA (sometimes called a healthcare FSA) for doctor visits, prescriptions, dental work, and other medical costs, and a dependent care FSA for daycare, preschool, or adult day care for an elderly parent. Some employers offer both; some offer only one. The rules and spending limits are different for each type.

The money in an FSA is yours to spend on covered expenses, but there is a catch: most FSAs operate on a "use-it-or-lose-it" rule. If you do not spend the money by the end of the plan year (usually December 31), you forfeit it. Some employers allow a grace period of up to 2.5 months into the next year, or let you carry over up to $610 (the 2024 limit) to the following year, but this varies by employer plan.

Key Takeaways

  • An FSA lets you contribute pre-tax money from your paycheck to cover medical or dependent care expenses, lowering your annual taxes.
  • You choose how much to contribute during open enrollment, and that amount is locked in for the entire plan year unless you have a may have access to life event.
  • Medical FSAs have a 2024 contribution limit of $3,300; dependent care FSAs have a limit of $5,000 per household per year.
  • Most FSAs use a use-it-or-lose-it rule, meaning unspent money at year-end is forfeited, though some plans offer a grace period or limited carryover.
  • You access FSA funds through a debit card, reimbursement form, or direct payment to providers, depending on your plan.

Medical FSA contribution limits and what you can spend on

For 2024, the maximum you can contribute to a medical FSA is $3,300 per year. This limit is set by the IRS and changes annually. Your employer deducts this amount from your paychecks in equal installments throughout the year, so the money is available to you as you need it.

A medical FSA covers a wide range of healthcare costs: doctor visit copays, deductibles, prescription medications, dental work, vision care (including glasses and contact lenses), hearing aids, and mental health treatment. It also covers some over-the-counter items like pain relievers and allergy medicine, but only if you have a prescription or a letter from your doctor saying you need them. Costs that are not covered include health insurance premiums, cosmetic procedures, and gym memberships.

You cannot use a medical FSA to pay for your health insurance premiums, with one exception: you can use it to pay for COBRA continuation coverage or premiums for health insurance while you are unemployed, if you receive unemployment benefits.

Dependent care FSA limits and may be able to access expenses

A dependent care FSA lets you set aside up to $5,000 per household per year (or $2,500 if you are married and file taxes separately). This money pays for childcare, preschool, after-school programs, or adult day care for an elderly or disabled dependent while you and your spouse (if married) are working or looking for work.

may be able to access expenses include daycare centers, in-home babysitters, nannies, preschool, and summer day camps. The care must be for a child under age 13 or a dependent of any age who is physically or mentally unable to care for themselves. You cannot use dependent care FSA money for overnight camps, school tuition for kindergarten and above, or babysitting for social outings.

One important rule: if you are married, both you and your spouse must be working (or one must be a full-time student or unable to work) for you to use a dependent care FSA. If only one spouse works, the account is not available.

How to access and spend FSA money

Most employers provide an FSA debit card that works like a regular debit card at pharmacies, doctor offices, and other healthcare providers. You swipe it and the cost is deducted from your FSA balance. Some plans require you to submit a reimbursement form instead: you pay out of pocket, keep your receipt, and send it to your FSA administrator to get reimbursed.

For dependent care, you typically pay the provider directly or submit receipts for reimbursement. Some employers let you pay the provider through an online portal that connects to your FSA account.

Keep all receipts and documentation. FSA administrators can ask you to prove that an expense was covered and may be able to access, and you need to show proof of payment. If you cannot provide documentation, you may have to repay the money to your FSA out of pocket.

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

The biggest limitation of an FSA is that unspent money does not roll over to the next year. If you contribute $2,000 to a medical FSA and only spend $1,500, you lose the remaining $500. This is why choosing the right contribution amount matters: contribute too much and you forfeit money; contribute too little and you miss the tax savings.

Some employers offer a grace period of up to 2.5 months after the plan year ends (usually through March 15) to spend remaining FSA funds. Others allow you to carry over up to $610 (for 2024) to the next year. A few plans offer both. Check your employer's plan documents to see what option applies to you.

Dependent care FSAs do not have a carryover option, but some plans do offer a grace period. The rules are set by your employer, so ask your benefits administrator what applies to your account.

Who can open an FSA and when

You can only open an FSA through your employer; you cannot buy one on your own. Your employer must offer an FSA as part of its benefits package. Not all employers do, especially small businesses.

You can enroll in an FSA during your employer's open enrollment period, which is usually once a year in the fall or winter. If you are a new employee, you typically have 30 to 60 days from your hire date to enroll. If you experience a may have access to life event — such as marriage, divorce, birth of a child, loss of other health coverage, or a significant change in dependent care costs — you can change your FSA contribution outside of open enrollment. Your employer's human resources or benefits department can tell you whether your situation qualifies.

FSA vs. HSA: key differences

An HSA (Health Savings Account) is often confused with an FSA because both are tax-advantaged accounts for medical expenses. The main differences: an HSA is portable (you keep it even if you change jobs), has higher contribution limits, and lets you carry over unused money indefinitely. An FSA is tied to your employer, has lower contribution limits, and operates on a use-it-or-lose-it basis.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). FSAs have no such requirement — you can have an FSA even if you have traditional health insurance. Some people have both an FSA and an HSA, though there are rules about how you can use them together.

If your employer offers both, compare the contribution limits, carryover rules, and whether you may have access to for an HSA before deciding which account to use.

Frequently Asked Questions

What happens to my FSA money if I leave my job?

You lose access to your FSA when you leave your employer. Any unspent money in the account is forfeited — it does not follow you to your next job. If you are leaving your job, spend down your FSA balance before your last day. You may be able to continue coverage through COBRA, but that requires paying premiums out of pocket.

Can I use my FSA for my spouse or children?

Yes, a medical FSA covers your spouse and any dependents listed on your health insurance plan. A dependent care FSA covers childcare for children under 13 or adult day care for a dependent of any age who cannot care for themselves. The dependent must live with you and be claimed on your tax return.

What if I spend more than my FSA balance?

You cannot spend more than you have contributed. If you try to use your FSA debit card and the balance is zero, the transaction will be declined. Plan your spending carefully or request a reimbursement form to pay out of pocket and submit for reimbursement later in the year.

Can I change my FSA contribution amount during the year?

No, unless you have a may have access to life event such as marriage, birth of a child, loss of other coverage, or a significant change in dependent care costs. Open enrollment is the only time most people can change their contribution. If you think your situation qualifies, contact your employer's benefits department.

Do I pay taxes on FSA money?

No. FSA contributions are deducted from your paycheck before federal income tax, Social Security tax, and Medicare tax are calculated. This lowers your taxable income and reduces the taxes you owe. However, you can only use FSA money for may be able to access medical or dependent care expenses — if you spend it on something not covered, you may owe taxes and penalties.