An FSA is a tax-advantaged account you fund with pre-tax money to pay for medical and dependent care costs

A Flexible Spending Account (FSA) is an employer-sponsored account that lets you set aside money before taxes are taken out of your paycheck, then use that money to pay for may be able to access medical expenses or dependent care. The tax savings come from the fact that the money you contribute reduces your taxable income — you pay federal income tax, Social Security tax, and Medicare tax on a smaller paycheck.

FSAs come in two types: a medical FSA (often called a healthcare FSA) and a dependent care FSA. Most employers offer the medical version, some offer both, and a few offer only dependent care. You choose which accounts to open during your employer's annual enrollment period, usually in the fall, and your elections take effect on January 1 of the following year.

The catch is the use-it-or-lose-it rule: money you don't spend by the end of the plan year (or a short grace period) goes back to your employer. This makes FSAs different from Health Savings Accounts (HSAs), which let you carry unused money forward indefinitely.

Key Takeaways

  • FSA contributions come out of your paycheck before taxes, which lowers your taxable income and can save you hundreds of dollars per year depending on your tax bracket.
  • Medical FSAs cover copays, deductibles, prescriptions, dental work, vision care, and other out-of-pocket health costs; dependent care FSAs cover daycare, preschool, and after-school care for children under 13.
  • You must spend FSA money by December 31 of the plan year or lose it, though many employers offer a 2.5-month grace period or a $610 carryover option.
  • You enroll in an FSA once per year during your employer's open enrollment, and your elections are locked in until the next enrollment period unless you have a may have access to life event.
  • FSAs are only available through an employer; you cannot open one on your own, and you lose access to the account if you leave your job.

How much you can contribute and what the limits are

For 2024, the maximum you can contribute to a medical FSA is $3,200 per year, and the maximum for a dependent care FSA is $5,000 per year (or $2,500 if you're married and file taxes separately). These limits change annually and are set by the IRS. Your employer may set a lower limit, so check your plan documents to see what your specific employer allows.

You decide how much to contribute during enrollment, and that amount is divided evenly across your paychecks for the year. If you contribute $2,400 to a medical FSA and get paid biweekly, $92.31 comes out of each paycheck before taxes. The money goes into your FSA account and sits there until you use it to pay for may be able to access expenses.

The tax savings depend on your tax bracket. If you're in the 22% federal tax bracket and contribute $2,400 to a medical FSA, you save roughly $528 in federal, Social Security, and Medicare taxes combined. Lower-income workers save less; higher-income workers save more.

What medical expenses an FSA covers

A medical FSA covers most out-of-pocket health costs that you would otherwise pay with after-tax money. This includes copays and coinsurance, deductibles, prescription medications, dental work (fillings, crowns, orthodontia), vision care (glasses, contacts, exams), hearing aids, and medical equipment like crutches or blood pressure monitors. Physical therapy, mental health counseling, and certain over-the-counter items (like pain relievers and allergy medicine, if you have a prescription) also count.

What doesn't count: health insurance premiums, cosmetic procedures, vitamins and supplements (unless prescribed), and most over-the-counter items without a prescription. The IRS maintains a detailed list, and your FSA plan administrator can tell you whether a specific expense is covered.

You pay the provider out of pocket, then submit a receipt or explanation of benefits to your FSA administrator to be reimbursed. Many FSAs now issue a debit card that you can use directly at pharmacies and doctors' offices, which skips the reimbursement step.

What dependent care expenses an FSA covers

A dependent care FSA pays for childcare while you work, including daycare centers, in-home nannies, preschool, and after-school programs for children under age 13. It also covers adult day care for a spouse or parent you claim as a dependent, if that care allows you to work.

The money must be used for care that enables you or your spouse to work (or, if you're a student, to attend school full-time). Summer camp counts only if it's part of a regular childcare arrangement during the school year. Overnight camps, tuition for kindergarten and above, and babysitting for social outings do not count.

Like a medical FSA, you pay the provider and request reimbursement, or your employer may allow the provider to bill your FSA account directly. You'll need the provider's tax ID number to claim reimbursement.

The use-it-or-lose-it rule and how to avoid losing money

Money left in your FSA at the end of the plan year is forfeited — your employer keeps it. This is the biggest risk of FSA participation. To avoid losing money, you need to estimate your medical or dependent care spending accurately and contribute only what you'll actually use.

Many employers offer a grace period of up to 2.5 months after the plan year ends (so through mid-March if your plan year ends December 31). Any expenses incurred during the grace period can be submitted for reimbursement, even if you pay for them in the new year. Check your plan documents to see if your employer offers this.

Some employers also offer a carryover option that lets you carry forward up to $610 (in 2024) of unused FSA money into the next plan year. This is less common than a grace period, and employers can choose whether to offer it. If your plan offers both, the grace period typically applies first.

The safest approach is to contribute conservatively — estimate what you'll spend and subtract 10 to 20 percent to account for uncertainty. If you have a major medical event or change in childcare needs mid-year, you may be able to change your FSA election if your employer allows it for may have access to life events (marriage, birth of a child, job loss, significant change in childcare costs).

How to access your FSA money and submit claims

Your employer assigns you an FSA plan administrator — a company like WageWorks, Conduent, or Fidelity that manages the account. When you enroll, you'll get login credentials for their website or app. You can check your balance, upload receipts, and request reimbursement through their portal.

To claim a reimbursement, you typically submit a receipt or explanation of benefits showing the date, amount, and type of expense. Some administrators accept photos of receipts uploaded through their app; others require you to mail them in. Processing usually takes 5 to 10 business days.

If your FSA comes with a debit card, you can swipe it at pharmacies, doctors' offices, and other providers that accept FSA cards. The card is linked to your account balance and deducts money automatically. You may still need to submit receipts for certain purchases, depending on the merchant and your plan.

FSAs versus HSAs and other savings options

An HSA (Health Savings Account) is similar to an FSA but has key differences. HSAs are only available if you have a high-deductible health plan, they let you carry money forward year to year, and they earn interest. HSAs also have higher contribution limits ($4,150 for individual coverage in 2024). The downside is that you must have a may have access to health plan, and not all employers offer HSAs.

A Health Reimbursement Arrangement (HRA) is funded entirely by your employer, not by you. Your employer decides how much money to put in, and you use it for medical expenses. HRAs are less common than FSAs and vary widely by employer.

If your employer offers both an FSA and an HSA, you cannot contribute to both in the same year — you have to choose one. Many people choose an HSA if they have access to one, because the money doesn't disappear at year-end. But if you have a traditional health plan (not high-deductible), an FSA may be your only option.

What happens to your FSA if you leave your job

When you leave your employer, your FSA account closes. You can continue to submit claims for expenses you incurred while employed, but only for a limited time (usually 60 to 90 days after your last day). Any unused balance is forfeited.

If you move to a new job with FSA coverage, you cannot transfer your old FSA balance to the new one. You'll need to enroll in your new employer's FSA during their open enrollment period. If you leave your job mid-year and don't have another FSA lined up, you may be able to continue your old FSA under COBRA, though you'll pay the full premium yourself (including the employer's share).

Frequently Asked Questions

Can I use my FSA for my spouse or children?

Yes, you can use your medical FSA to pay for may be able to access expenses for your spouse and any children you claim as dependents, even if they're not on your health insurance plan. You cannot use a dependent care FSA to pay for your own care, but you can use it for your spouse's or parent's care if they're your dependent and the care allows you to work.

What happens if I submit a claim after the plan year ends?

If your employer offers a grace period, you can submit claims for expenses incurred during the grace period (usually through mid-March). After the grace period ends, you cannot submit claims for expenses from the previous plan year. Any unspent money is forfeited.

Can I change my FSA contribution mid-year?

No, unless you have a may have access to life event such as marriage, birth of a child, job loss, or a significant change in childcare costs. Your employer decides which life events may have access to. If you don't have a may have access to event, your contribution amount is locked in until the next enrollment period.

Do I need receipts to use my FSA debit card?

It depends on the merchant and your plan. At pharmacies and doctors' offices, the transaction usually goes through without a receipt. At other retailers, your FSA administrator may ask you to submit a receipt to verify the expense was may be able to access. Keep receipts for at least three years in case you're audited.

What if I overestimate my spending and have money left over?

If you have a grace period or carryover option, some of that money may be preserved. Otherwise, it's forfeited. To minimize waste, contribute conservatively and track your spending throughout the year so you can adjust your estimate for the next plan year.