FSA stands for Flexible Spending Account

An FSA is a workplace savings account that lets you set aside pre-tax money to pay for medical and dependent care costs. Your employer takes the money from your paycheck before taxes are calculated, which lowers your taxable income for the year. You then use the FSA debit card or submit receipts to reimburse yourself for out-of-pocket healthcare expenses.

FSAs are offered through your employer's benefits plan, not through the government. They are separate from health insurance — you can have both at the same time. The account belongs to you only while you work there; if you leave the job, the account closes and any unused money is forfeited.

Key Takeaways

  • FSA money comes from your own paycheck but is deducted before income tax, saving you money on taxes.
  • You decide how much to contribute each year during open enrollment, and that amount is locked in unless you have a may have access to life change.
  • FSA funds can pay for copays, deductibles, prescriptions, dental work, vision care, and some over-the-counter medical items, but not health insurance premiums.
  • Any money you do not use by the end of the plan year is forfeited — there is no rollover to the next year in most plans.

How much you can contribute to an FSA

The IRS sets an annual limit on how much you can put into an FSA. For 2024, that limit is $3,200 per year. Your employer may set a lower limit, so check your plan documents to see what your workplace allows.

You choose your contribution amount during open enrollment, which usually happens once a year in the fall. The money is divided evenly across your paychecks for the rest of the year. If you have a may have access to event — such as marriage, divorce, birth of a child, or loss of other health coverage — you can change your contribution amount outside of open enrollment.

What expenses an FSA can cover

FSA funds pay for many medical and dental costs that your health insurance does not cover or only partially covers. These include copays and coinsurance, deductibles, prescription medications, dental cleanings and fillings, eyeglasses and contact lenses, hearing aids, and certain over-the-counter items like pain relievers and allergy medicine.

FSA money cannot pay for health insurance premiums, cosmetic procedures, or general wellness products like vitamins or gym memberships. Dependent care FSAs (a separate type of account) cover childcare and adult daycare costs, not medical expenses. Your plan documents or your employer's benefits website will list exactly what your FSA covers.

The use-it-or-lose-it rule

Money in an FSA does not roll over to the next year. If you contribute $2,000 and spend only $1,500 by December 31, you forfeit the remaining $500. This is why many people contribute conservatively — they estimate only the medical costs they are confident they will have.

Some employers offer a grace period of up to 2.5 months into the next year to spend the previous year's money, or a carryover of up to $610 (as of 2024). Check your plan to see if either option is available. If neither applies, unspent money goes back to your employer.

How to use your FSA

Most FSAs come with a debit card that you can use at pharmacies, doctors' offices, and other healthcare providers. When you swipe the card, the provider submits a claim to your FSA plan, and the money is deducted from your account. For expenses where you cannot use the card, you pay out of pocket and then submit a receipt and claim form to your FSA administrator for reimbursement.

Keep all receipts and documentation. Your FSA administrator may ask you to prove that an expense was medical or dependent care related, especially for items that could be personal purchases. Reimbursement usually takes one to two weeks after you submit a claim.

FSA versus HSA: the key difference

An HSA (Health Savings Account) and an FSA both use pre-tax money for medical costs, but they work differently. An HSA is only available if you have a high-deductible health plan, and money rolls over year to year — you can save it indefinitely. An FSA is available through most employer plans and has the use-it-or-lose-it rule.

HSAs also allow you to invest the money and withdraw it tax-free in retirement for any expense, not just medical ones. FSAs are simpler but less flexible. Some employers offer both, and you can contribute to an HSA but not an FSA in the same year.

What happens to your FSA when you leave your job

When you leave your employer, your FSA account closes immediately. You can no longer contribute or use the debit card. Any unused balance is forfeited, even if you are in the middle of the plan year.

If you have submitted claims before your last day, those will still be processed and reimbursed. After you leave, you may be able to continue health coverage through COBRA, but that is separate from your FSA — COBRA covers insurance, not the spending account. Your new employer may offer its own FSA, and you can enroll during their open enrollment period.

Frequently Asked Questions

Can I use my FSA for my spouse or children?

Yes, FSA money can pay for medical and dental costs for your spouse and tax-dependent children, even if they are not on your health insurance plan. You cannot use it for adult children or other family members unless they are your tax dependents. Keep receipts showing the patient's name to prove the expense was for a covered family member.

What if I do not spend all my FSA money by the end of the year?

The unused money is forfeited unless your plan offers a grace period or carryover. Some employers allow you to spend money from the previous year until mid-March, or to carry over up to $610 into the next year. Check your plan documents or ask your benefits administrator what applies to you.

Can I withdraw FSA money for non-medical reasons?

No. Withdrawing FSA money for anything other than covered medical or dependent care expenses triggers taxes and a 20% penalty on the amount withdrawn. The only exception is if you have a may have access to life event that lets you change your contribution or close your account early.

Do I have to use my FSA debit card, or can I pay out of pocket?

You can do either. Some people use the debit card for convenience, while others pay out of pocket and submit receipts for reimbursement. Reimbursement takes longer but gives you time to gather documentation. Both methods draw from the same account balance.

Can I have an FSA and an HSA at the same time?

No. If you contribute to an HSA, you cannot contribute to an FSA in the same year. However, you can have an FSA and a regular health insurance plan, or an HSA and a high-deductible health plan. Your employer's benefits team can explain which combinations are available to you.