A flex 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 into an account before taxes are taken out. You then use that money to pay for certain medical expenses or childcare costs throughout the year. The main advantage is that the money you contribute reduces your taxable income, which means you pay less in federal income tax and Social Security tax.

Your employer sets up the FSA through a plan administrator — a third-party company that manages the account. You decide how much to contribute each year during your employer's open enrollment period, usually in the fall. That amount is divided across your paychecks for the coming year. When you have a covered expense, you submit a receipt or claim form to get reimbursed from your FSA balance.

FSAs come in two types: a medical FSA (also called a health care FSA) for medical, dental, and vision expenses, and a dependent care FSA for childcare or adult daycare costs. Some employers offer both, and you can contribute to each one separately.

Key Takeaways

  • Money you contribute to an FSA comes out of your paycheck before taxes, lowering the income tax and Social Security tax you owe.
  • A medical FSA covers doctor visits, prescriptions, dental work, and other may have access to medical expenses; a dependent care FSA covers childcare or adult daycare.
  • You must submit receipts or claim forms to get reimbursed, and you can only use the money for expenses that happen during the plan year.
  • FSAs have a "use-it-or-lose-it" rule: money you don't spend by the end of the year (plus a short grace period) goes back to your employer.
  • You can only change your FSA contribution during open enrollment or if you have a may have access to life event like a birth, marriage, or job loss.

How much you can contribute and what the tax savings look like

The IRS sets a limit on how much you can contribute to a medical FSA each year. For 2024, that limit is $3,200; for 2025, it is $3,300. These limits change annually. A dependent care FSA has a separate limit of $5,000 per year for married couples filing jointly, or $2,500 for single filers or married couples filing separately.

The tax savings depend on your income and tax bracket. If you contribute $2,500 to a medical FSA and you are in the 22% federal tax bracket, you save roughly $550 in federal income tax alone. You also avoid paying Social Security tax (6.2%) and Medicare tax (1.45%) on that $2,500, which adds another $195 in savings. The actual amount varies based on your specific tax situation, so talking with a tax professional or your employer's benefits team can give you a clearer picture.

Keep in mind that FSA contributions reduce your taxable income but do not lower the amount you owe in state income tax in most states. A few states do not tax FSA contributions, but most do.

What medical expenses you can pay for with an FSA

A medical FSA covers a wide range of health-related costs. Common covered expenses include doctor visit copays, prescription medications, dental work (cleanings, fillings, orthodontics), vision care (eye exams, glasses, contact lenses), hearing aids, and medical equipment like crutches or blood pressure monitors. You can also use it for mental health counseling, physical therapy, and over-the-counter items like pain relievers and allergy medicine — but only if you have a prescription from a doctor.

Expenses that are not covered include cosmetic procedures, gym memberships, vitamins without a prescription, and most over-the-counter items without a doctor's prescription. Health insurance premiums and long-term care insurance are also not covered. If you are unsure whether a specific expense qualifies, your FSA plan administrator can tell you before you spend the money.

You do not have to wait until you receive a bill to submit a claim. You can submit receipts as soon as you pay for a covered expense, and the FSA will reimburse you from your current balance. Some employers offer an FSA debit card that you can use at pharmacies and medical offices, which speeds up the process.

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

FSAs operate under a use-it-or-lose-it rule: any money you do not spend by the end of the plan year is forfeited and goes back to your employer. You cannot carry the balance forward to the next year. This is one of the biggest drawbacks of FSAs and requires careful planning when you decide how much to contribute.

Most plans offer a grace period of up to 2.5 months after the plan year ends. If your plan year ends on December 31, you typically have until March 15 to submit claims for expenses that occurred in December. Check your plan documents to see if your employer offers this grace period and how long it lasts.

Some employers also offer a carryover option that lets you carry up to $640 (for 2024) into the next year, though not all plans include this. Ask your benefits team whether your plan has a carryover option. If it does not, the safest approach is to contribute only the amount you are confident you will spend in the coming year, based on your past medical expenses.

Dependent care FSA for childcare and adult daycare

A dependent care FSA works the same way as a medical FSA but covers childcare and adult daycare costs instead. You can use it to pay for daycare centers, in-home babysitters, preschool, after-school programs, and adult daycare for an aging parent or disabled spouse. The money must be used for care that allows you or your spouse to work.

You cannot use a dependent care FSA to pay for overnight camps, kindergarten or higher education, or babysitting for social outings. The care provider does not have to be licensed, but you will need their name, address, and tax ID number to claim reimbursement. If you use a nanny or in-home provider, you may also need to report their income to the IRS.

The dependent care FSA limit is $5,000 per year for married couples filing jointly or $2,500 for single filers. This limit is shared with the dependent care tax credit, so if you use an FSA, you cannot claim the full tax credit on your tax return — you have to reduce the credit by the amount you contributed to the FSA.

When you can change your FSA contribution

You can only change how much you contribute to an FSA during your employer's open enrollment period, which usually happens once a year in the fall. Changes take effect on January 1 of the following year. Outside of open enrollment, you are locked into your contribution amount for the entire plan year.

There are exceptions: if you have a may have access to life event, you can change your contribution mid-year. may have access to events include marriage, divorce, birth or adoption of a child, death of a spouse or dependent, loss of health insurance coverage, a significant change in childcare costs, or a change in your spouse's employment or benefits. You typically have 30 to 60 days after the event to notify your employer and make the change.

If you leave your job, you lose access to your FSA. Some employers offer COBRA continuation for FSAs, which lets you keep the account for a limited time, but you have to pay the full premium yourself. Check with your employer's benefits team about what happens to your FSA balance if you resign or are laid off.

FSA vs. HSA: which one is right for you

If your employer offers both an FSA and a Health Savings Account (HSA), you may wonder which one to choose. The main difference is that an HSA lets you carry money forward year to year, while an FSA does not. An HSA also requires you to be enrolled in a high-deductible health plan, while an FSA works with any health insurance plan.

An HSA has higher contribution limits ($4,150 for individual coverage in 2024) and can be invested like a retirement account. An FSA has lower limits but is simpler to use and does not require a specific type of health plan. If you have predictable medical expenses each year and want to avoid the risk of losing money, an HSA is usually the better choice. If your medical expenses vary widely or you do not may have access to for an HSA, an FSA can still save you money on taxes.

You cannot contribute to both an FSA and an HSA in the same year, with one exception: you can have a dependent care FSA and an HSA at the same time. Talk with your employer's benefits team about which account makes sense for your situation.

Frequently Asked Questions

What happens to my FSA money if I don't use it by the end of the year?

Any unused balance is forfeited and returned to your employer. Most plans offer a grace period of up to 2.5 months after the plan year ends to submit claims for expenses that occurred during the plan year. Some employers also allow you to carry over up to $640 into the next year, but this is optional. Check your plan documents to see what applies to you.

Can I use my FSA debit card at any pharmacy or doctor's office?

If your employer offers an FSA debit card, you can use it at most pharmacies and medical offices that accept it. However, some expenses still require you to submit a receipt and claim form for reimbursement. Ask your plan administrator which vendors accept the card and which expenses require manual claims.

What if I have a baby during the year and want to add childcare to my dependent care FSA?

A birth is a may have access to life event, so you can change your dependent care FSA contribution within 30 to 60 days of the birth. You will need to notify your employer's benefits team and submit a birth certificate or other proof. The new contribution amount takes effect the month after you make the change.

Can I use my medical FSA to pay for my spouse's or child's medical expenses?

Yes, you can use your FSA to pay for covered medical expenses for your spouse and any dependent children on your tax return, even if they are not covered under your health insurance plan. You just need to submit receipts showing the expense was for a covered person.

Do I have to submit receipts every time I use my FSA?

If you use an FSA debit card at a pharmacy or doctor's office, the transaction is usually processed automatically without a receipt. For other expenses, you will need to submit a receipt or itemized bill to your plan administrator. Keep all receipts for at least three years in case the IRS audits your return.