A Flexible Spending Account lets you set aside pre-tax money from your paycheck to pay for medical and dependent care costs

A Flexible Spending Account (FSA) is a workplace benefit that lets you put money aside before taxes are taken out, then use that money to pay for certain medical and dependent care expenses. Your employer deducts the amount you choose directly from your paycheck throughout the year, and you withdraw from the account as you incur costs. Because the money comes out before federal income tax and payroll taxes are calculated, you pay less in taxes overall.

FSAs are offered through your employer's benefits plan — you cannot open one on your own. They are separate from health insurance; you can have an FSA whether your health plan is through your employer, a spouse's employer, or the individual market. The account is "use it or lose it," meaning money you do not spend by the end of the plan year generally does not roll over to the next year, though some employers offer a grace period or carryover option.

Key Takeaways

  • You choose how much to contribute each year during your employer's open enrollment period, and the amount is deducted from your paycheck before taxes.
  • FSAs cover specific medical expenses (copays, deductibles, prescriptions, dental, vision) and dependent care costs (daycare, after-school programs, adult day care), but not all health costs.
  • You must spend the money by the end of the plan year or lose it, unless your employer offers a grace period (usually 2.5 months) or allows a small carryover.
  • You access the money through a debit card, reimbursement request, or direct payment to providers, depending on how your employer's plan is set up.
  • FSAs are only available through an employer; you cannot open one independently, and you must enroll during your company's open enrollment window.

What expenses an FSA actually covers

FSAs come in two types: a medical FSA and a dependent care FSA. Most employers offer the medical version, some offer both, and a few offer only dependent care.

A medical FSA covers out-of-pocket medical costs that you would pay anyway. This includes copays and coinsurance for doctor visits, urgent care, and emergency room visits; deductibles you have to meet before insurance kicks in; prescription medications; dental work not covered by dental insurance; vision care including glasses, contacts, and exams; hearing aids and batteries; and over-the-counter items like pain relievers, allergy medicine, and first-aid supplies (though rules on these changed in 2020 and vary by plan). It does not cover health insurance premiums, cosmetic procedures, or treatments your insurance does not cover at all.

A dependent care FSA covers costs to care for a child under 13 or a dependent adult (spouse or parent) so you can work. This includes daycare centers, in-home nannies, after-school programs, summer day camps, and adult day care for an aging parent. It does not cover overnight camps, school tuition (even if the school provides care), or care by a spouse or a dependent you claim on your taxes.

How much you can contribute and what it costs you

For 2024, the maximum you can put into a medical FSA is $3,200 per year. For dependent care, the limit is $5,000 per year (or $2,500 if you are married and file taxes separately). Your employer may set a lower limit. You choose your contribution amount during open enrollment, usually in November or December, and the amount is locked in for the entire plan year — you cannot change it unless you have a may have access to life event like a birth, marriage, or loss of other coverage.

The real savings come from taxes. If you contribute $2,000 to a medical FSA, that $2,000 is not subject to federal income tax, Social Security tax, or Medicare tax. Depending on your tax bracket and state, you might save 20 to 40 percent of that amount in taxes. For example, if you are in the 22 percent federal tax bracket plus 7.65 percent payroll tax, a $2,000 contribution saves you roughly $590 in taxes. Your employer also saves on payroll taxes and sometimes passes part of that savings back by contributing to your account.

How to access money in your FSA

The way you spend FSA money depends on your employer's plan setup. Many employers issue a debit card linked to your FSA account; you swipe it at the pharmacy, doctor's office, or daycare provider, and the money comes out automatically. Some plans require you to pay out of pocket and then submit a reimbursement request with a receipt; the plan reimburses you within a few days to a few weeks. A few plans let you submit claims online or by mail.

You need to keep receipts and documentation for anything you buy with FSA money. The IRS can audit FSA accounts, and if you cannot prove an expense was may be able to access, you may have to repay the money or face penalties. Most FSA administrators provide a website or app where you can track your balance, submit claims, and see what you have spent.

If you leave your job, you generally lose access to your FSA balance immediately — the money does not follow you to a new employer. Some plans let you continue coverage under COBRA for a limited time, but you have to pay the full premium yourself. This is one reason to be careful about how much you contribute: if you think you might leave your job, contribute only what you are confident you will spend.

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

At the end of your plan year, any money left in your FSA is forfeited — you cannot roll it over to the next year or cash it out. This is a federal rule, not a choice by your employer. However, employers can offer two ways to soften this rule: a grace period or a carryover.

A grace period (usually 2.5 months) lets you spend money from the previous year's account during the first part of the new year. For example, if your plan year ends December 31, a grace period might let you submit claims for expenses incurred through March 15 of the next year, even though the money came from the previous year's account. A carryover lets you roll up to $640 (in 2024) of unused money into the next year's account. Your employer chooses whether to offer either option, both, or neither — check your plan documents or ask your benefits administrator which applies to you.

Because of this rule, the biggest mistake people make is overestimating how much they will spend. If you are unsure, start with a smaller amount — you can always increase it next year. If you have a planned medical procedure or know you will need glasses, that is a good time to contribute more.

FSAs versus Health Savings Accounts and other options

FSAs are often confused with Health Savings Accounts (HSAs), but they work differently. An HSA is only available if you have a high-deductible health plan; it has higher contribution limits ($4,150 for individual coverage in 2024); and unused money rolls over forever — there is no "use it or lose it" rule. You can also invest HSA money in stocks and bonds, and withdraw it tax-free in retirement for any expense, not just medical. However, HSAs are less common, and not everyone qualifies.

Some employers offer both an FSA and an HSA, but you cannot contribute to both in the same year. If your employer offers an HSA and you have a high-deductible plan, an HSA is usually the better choice because of the rollover feature. If you have a traditional health plan with a lower deductible, an FSA may be your only option.

If your employer does not offer an FSA, you have no other way to set aside pre-tax money for medical expenses. You can still pay for medical costs with after-tax dollars, but you do not get the tax savings.

Frequently Asked Questions

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

You lose access to your FSA balance immediately when you leave your employer. The money does not transfer to a new job or a personal account. Some plans let you continue coverage under COBRA, but you pay the full premium yourself and must do so within 60 days of leaving. Check with your benefits administrator about COBRA before you resign if you have a large balance.

Can I use my FSA debit card at any store?

No. FSA debit cards are restricted to may be able to access merchants — pharmacies, doctor's offices, dental offices, vision centers, and medical supply stores. You cannot use them at grocery stores or general retailers, even to buy over-the-counter medical items, unless the store has a pharmacy or medical section. If you swipe the card at an ineligible merchant, the transaction may be declined or you may be asked to provide a receipt proving the purchase was medical.

Can I change my FSA contribution mid-year?

No, unless you have a may have access to life event. These include birth or adoption of a child, marriage or divorce, loss of other health coverage, a significant change in your spouse's benefits, or a change in your dependent care needs. If you experience one of these events, you usually have 30 to 60 days to change your contribution. Check your plan documents or ask your benefits administrator what events may have access to.

Do I have to have health insurance to use an FSA?

No. You can have an FSA even if you are uninsured or have coverage through a spouse's plan, the individual market, or Medicare. However, you must be employed by the company offering the FSA, and you must enroll during the open enrollment period or within 30 days of a may have access to life event.

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

The money is forfeited — you cannot carry it over unless your employer offers a carryover option (up to $640 in 2024) or a grace period (usually 2.5 months into the next year). This is why it is important to estimate conservatively. If you regularly have leftover money, contribute less next year and use after-tax dollars for the rest of your medical expenses.