FSA stands for Flexible Spending Account

An FSA (Flexible Spending Account) is a savings account you set up through your employer that lets you set aside pre-tax money to pay for medical expenses. 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 that money sits in the account until you use it to pay for covered medical costs.

The account is "flexible" because you choose the amount you contribute and decide when to spend it on may be able to access expenses. It is not a health insurance plan — it works alongside whatever health coverage you have. The money is yours to use, but there are rules about what counts as a medical expense and what happens to unused funds.

Key Takeaways

  • FSA stands for Flexible Spending Account, and it holds pre-tax money you set aside for medical expenses through your employer.
  • You contribute money by payroll deduction during open enrollment, and the money is deducted before income taxes are calculated.
  • You can use FSA funds to pay for a wide range of medical costs, including copays, deductibles, prescriptions, and some over-the-counter items.
  • Money left in your FSA at the end of the year is typically forfeited, though some employers offer a grace period or carryover option.
  • FSAs are separate from Health Savings Accounts (HSAs) and are available only if your employer offers one.

How money flows into and out of your FSA

You enroll in an FSA during your employer's open enrollment period, usually once a year in the fall or winter. You decide how much to contribute for the coming year — this amount is divided by the number of pay periods and deducted from each paycheck before taxes. For 2024, the maximum contribution is $3,200 per year, though this limit changes annually.

When you incur a medical expense, you pay for it out of pocket and then request reimbursement from your FSA. Most employers give you a debit card linked to the account, which you can use directly at pharmacies and medical offices. Others require you to submit receipts and a claim form to get reimbursed. Either way, the money comes from your FSA balance, not from your regular bank account.

What expenses your FSA can cover

FSAs cover a broad range of medical costs. Copays, coinsurance, and deductibles all may have access to. Prescription medications, insulin, and inhalers are covered. Dental work, vision care, and hearing aids are may be able to access. Over-the-counter items like pain relievers, allergy medicine, and first-aid supplies also count, though you typically need a prescription or doctor's note for over-the-counter drugs.

Some expenses do not may have access to. Cosmetic procedures, gym memberships, and general wellness products are not covered. Health insurance premiums themselves cannot be paid from an FSA, though you can use FSA money to cover the out-of-pocket costs that your insurance does not pay. Your employer's plan documents or your FSA administrator's website will list the full set of may be able to access expenses for your specific account.

The "use it or lose it" rule and exceptions

Money left in your FSA at the end of the plan year is forfeited — you cannot roll it over to the next year or take it out as cash. This is called the "use it or lose it" rule, and it is one of the biggest drawbacks of FSAs. Because of this rule, you need to estimate carefully how much medical spending you will have in the coming year. Overestimate and you lose money; underestimate and you pay out of pocket.

Some employers offer a grace period or a limited carryover to soften this rule. A grace period typically allows you to spend down your FSA balance for two and a half months into the next plan year. A carryover lets you roll up to $640 (in 2024) into the next year. Not all employers offer either option, so check your plan documents to see what applies to you.

How FSAs differ from HSAs and other accounts

An FSA is often confused with a Health Savings Account (HSA), but they are different. An HSA is only available if you have a high-deductible health plan, and unlike an FSA, unused money rolls over year to year. You can invest HSA funds and use them in retirement. An FSA has no investment option and no carryover (unless your employer offers one), but you do not need a high-deductible plan to use one.

A Dependent Care FSA is a separate account some employers offer for childcare and adult care expenses. It works the same way as a medical FSA but covers different costs. Some employers also offer a Limited-Purpose FSA, which covers only dental and vision expenses and can be paired with an HSA.

Who can set up an FSA

You can only open an FSA if your employer offers one — you cannot set one up on your own. Not all employers provide FSAs, and those that do may limit enrollment to certain times of year. If you change jobs, your FSA does not transfer; you must spend down the balance before you leave or forfeit it.

If you are self-employed or work for a small employer that does not offer an FSA, an HSA may be your alternative if you have a high-deductible health plan. Some professional associations and groups also offer FSAs to their members, though this is less common.

Common mistakes to avoid with FSAs

The biggest mistake is contributing too much and losing money at year-end. Start by tracking your medical spending from the past two or three years, then contribute a conservative amount based on that history. If you have a planned procedure or know you will need glasses, factor that in — but do not guess at future needs you cannot predict.

Another mistake is not knowing which expenses may have access to. Over-the-counter medications, for example, require a prescription to be FSA-may be able to access, but many people do not know this and buy them without one. Keep receipts and ask your FSA administrator if you are unsure whether an expense qualifies before you pay for it. Finally, do not wait until December to use your balance — submit claims early so you have time to correct any problems before the year ends.

Frequently Asked Questions

Can I use my FSA for my family members' medical expenses?

Yes, you can use FSA funds to pay for the medical expenses of your spouse and dependents, even if they are not covered under your health insurance plan. The expense must still be may be able to access — copays, prescriptions, dental work, and vision care all count. You do not need to be the one receiving the care, just the one paying for it.

What happens to my FSA if I leave my job?

You lose access to your FSA when you leave your employer. You have a limited time (usually 60 to 90 days) to submit claims for expenses you incurred while employed, but you cannot add new money or use the account after your employment ends. Any unused balance is forfeited. If you move to a new job with an FSA, you start fresh with a new account.

Can I change my FSA contribution during the year?

No, you cannot change your contribution amount outside of open enrollment unless you have a may have access to life event — marriage, divorce, birth of a child, loss of other health coverage, or a significant change in your employer's plan. If you experience a may have access to event, you usually have 30 to 60 days to make changes.

Do I need receipts to use my FSA?

It depends on how your employer set up the account. If you have an FSA debit card, you may not need to provide receipts for every purchase, though the card issuer may ask for them later. If you submit claims by mail or online, you will need to provide receipts and an explanation of the expense. Keep all receipts for at least three years in case of an audit.

Can I use my FSA to pay for health insurance premiums?

You cannot use FSA funds to pay your health insurance premiums directly. However, you can use FSA money to pay for copays, deductibles, and other out-of-pocket costs that your insurance does not cover. You also cannot use an FSA to pay COBRA premiums, though you can use it for the medical expenses COBRA covers.