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

A Flexible Savings 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 medical expenses and dependent care costs that your health insurance doesn't cover. The main advantage is that the money you contribute reduces your taxable income for the year, which can lower your overall tax bill.

FSAs are offered through your employer, not through the government. Your employer sets up the account through a benefits administrator, and you decide how much to contribute during your company's open enrollment period — usually once a year in the fall. The money comes out of your paycheck automatically throughout the year.

The catch is that FSAs have strict rules about what you can spend the money on and when you can access it. Money left over at the end of the year is forfeited — you cannot roll it into the next year or take it out as cash. This "use it or lose it" rule means you need to estimate carefully how much you will actually spend.

Key Takeaways

  • FSA contributions come from your paycheck before taxes, which reduces the amount of income tax you owe that year.
  • You can only use FSA money for specific medical and dependent care expenses that your insurance does not cover.
  • Money you do not spend by the end of the plan year is forfeited; there is no carryover to the next year in most cases.
  • You must enroll during your employer's open enrollment period, which typically happens once per year.
  • FSAs are separate from health insurance and work alongside whatever plan your employer offers.

What expenses you can pay for with an FSA

FSAs cover two main categories: medical expenses and dependent care. For medical costs, you can use FSA money for copays, coinsurance, deductibles, and prescription medications. You can also pay for items like glasses, contact lenses, hearing aids, and dental work that your insurance does not fully cover. Over-the-counter medications like pain relievers and allergy medicine are covered only if you have a prescription from your doctor.

Dependent care expenses include daycare, after-school programs, summer camps, and adult day care for an elderly parent or disabled spouse. The dependent must be someone you claim on your taxes and someone you need care for so you can work. You cannot use FSA money for school tuition, overnight camps, or care that happens while you are not working.

Common expenses that are not covered include cosmetic procedures, gym memberships, vitamins without a prescription, and general wellness products. If you are unsure whether something qualifies, your FSA administrator can tell you before you spend the money.

How much you can contribute and when money comes out

The IRS sets a maximum contribution limit each year. For 2024, the limit is $3,300 for medical FSAs and $5,000 for dependent care FSAs. Your employer may set a lower limit. You choose your contribution amount during open enrollment, and that amount is divided by the number of pay periods in the year — so if you contribute $2,400 to a medical FSA and get paid every two weeks, roughly $92 comes out of each paycheck.

Money is available to you as soon as it is deposited into the account, even if you have not yet contributed that full amount through payroll deductions. This means you can use your FSA card to pay for an expense on January 15th even if you will not finish contributing the full year's amount until December. However, if you leave your job or change plans before the year ends, you lose access to any money you have not yet spent.

You access the money through an FSA debit card that your administrator provides, or you can pay out of pocket and submit receipts for reimbursement. Keep all receipts and documentation — your FSA administrator may ask for proof that an expense was medical or dependent care related.

The "use it or lose it" rule and limited exceptions

Any money left in your FSA at the end of the plan year is forfeited. You cannot carry it over to the next year, and you cannot withdraw it as cash. This is the biggest drawback of FSAs and why contribution amounts matter. If you contribute $2,500 and only spend $1,800, you lose the remaining $700.

There are two limited exceptions. Some employers offer a grace period of up to 2.5 months after the plan year ends, during which you can still spend money from the previous year's account. Not all employers offer this, so check with your benefits administrator. A few employers also allow a small carryover — typically $570 or less — but this is rare and depends entirely on your employer's plan design.

Because of this rule, estimate conservatively. Look at your medical bills and dependent care costs from the past year, and contribute an amount you are confident you will spend. If you are unsure, contribute less rather than more.

How FSAs differ from Health Savings Accounts

FSAs and Health Savings Accounts (HSAs) are both tax-advantaged accounts for medical expenses, but they work differently. An FSA is offered by your employer and has the use-it-or-lose-it rule. An HSA is tied to a high-deductible health insurance plan and lets you roll money over year to year — anything you do not spend stays in the account and grows.

You can have an FSA and an HSA at the same time if your employer offers both and you are enrolled in a high-deductible plan. However, if you have an HSA, you cannot contribute to a dependent care FSA in the same year. You can have a medical FSA and an HSA together, but the money you spend from the HSA counts toward your FSA limit for the year.

HSAs are generally better if you want to save money long-term, because the money does not disappear. FSAs are better if you have predictable medical or dependent care costs each year and want to reduce your taxes now.

Enrollment, changes, and what happens when you leave your job

You enroll in an FSA during your employer's open enrollment period, which is usually in October or November for a plan year that starts January 1st. You choose your contribution amount and confirm which type of FSA you want — medical, dependent care, or both. Once enrollment closes, you cannot change your contribution amount unless you have a may have access to life event, such as the birth of a child, marriage, divorce, or loss of other health coverage.

If you leave your job, your FSA account closes. You can continue to submit claims for expenses you incurred while you were enrolled, but only for a limited time — usually 60 to 90 days after your employment ends. Any unspent money is forfeited. Some employers offer COBRA continuation for FSAs, which lets you keep the account for a short period after you leave, but you must pay the full premium yourself.

If you change jobs and your new employer offers an FSA, you start fresh with a new account and a new contribution amount. Money from your old FSA does not transfer.

Tax savings and how to calculate your benefit

The main benefit of an FSA is the tax savings. Because FSA contributions come out before federal income tax, Social Security tax, and Medicare tax are calculated, you pay less in taxes overall. If you contribute $2,400 to a medical FSA and your combined tax rate is 25%, you save roughly $600 in taxes that year.

To estimate your tax savings, multiply your planned FSA contribution by your tax rate. Your tax rate includes federal income tax, state income tax (if your state allows FSA deductions), Social Security tax (6.2%), and Medicare tax (1.45%). Your payroll department or tax preparer can tell you your rate.

The tax savings are real, but they only matter if you actually spend the money. If you contribute $2,400 and lose $600 of it at year-end, your net savings is only $150 in taxes on the $600 you did not use — and you still lost the $600 itself. This is why careful estimation is critical.

Frequently Asked Questions

Can I use my FSA for my spouse or children?

Yes, you can use FSA money for medical expenses of your spouse and any dependent children you claim on your taxes. For dependent care FSAs, the care must be for a child under age 13, a spouse who is unable to care for themselves, or a parent or other dependent you support. The dependent must live with you for more than half the year.

What happens if I contribute too much and have money left over?

Any balance remaining at the end of the plan year is forfeited unless your employer offers a grace period (up to 2.5 months to spend it) or a limited carryover. To avoid this, estimate your spending conservatively and contribute only what you are confident you will use. If your circumstances change mid-year, ask your benefits administrator whether a may have access to life event allows you to lower your contribution.

Can I withdraw FSA money as cash if I do not use it?

No. FSA money can only be used for may have access to medical and dependent care expenses. You cannot cash out unused funds, and you cannot roll the money into a savings account or another type of account. This is why the use-it-or-lose-it rule is so important to understand before you enroll.

Do I need health insurance to have an FSA?

No. You can have a medical FSA even if you are uninsured, though most people have an FSA through their employer's health plan. A dependent care FSA does not require health insurance at all — it is purely for childcare and adult dependent care costs.

Can I change my FSA contribution amount during the year?

Only if you have a may have access to life event, such as a birth, marriage, divorce, significant change in dependent care costs, or loss of other coverage. Routine changes are allowed only during open enrollment. Contact your benefits administrator to find out whether your situation qualifies for a mid-year change.