A flexible spending account lets you set aside pretax money from your paycheck to pay for medical and dependent care costs that your insurance doesn't cover

A flexible spending account (FSA) is an employer-sponsored plan where you contribute money before taxes are taken out of your paycheck. You then use that money to pay for may be able to access medical expenses or dependent care costs. The main advantage is that you avoid paying federal income tax, Social Security tax, and Medicare tax on the money you contribute — which typically saves you 20 to 40 percent depending on your tax bracket.

FSAs are offered by many employers as part of their benefits package, but not all. If your employer offers one, you enroll during open enrollment, usually once a year. You decide how much to contribute for the year, and that amount is divided across your paychecks. You then submit receipts or use a debit card to withdraw money from the account to pay for covered expenses.

Key Takeaways

  • FSA contributions come from your paycheck before taxes, which reduces the amount of income tax and payroll taxes you owe.
  • You can use FSA money for medical expenses your insurance doesn't cover, such as copays, deductibles, glasses, and dental work.
  • Money left in your FSA at the end of the year is forfeited — you cannot carry it over to the next year, with limited exceptions.
  • You must enroll during your employer's open enrollment period, and you cannot change your contribution amount mid-year unless you have a may have access to life event.
  • FSAs are separate from Health Savings Accounts (HSAs) and have different rules about what you can spend money on and how much you can contribute.

What expenses you can pay for with an FSA

FSA money can cover a wide range of medical and dependent care costs. For medical expenses, this includes copays and coinsurance amounts you owe to doctors and hospitals, deductibles you have to meet before insurance kicks in, prescription medications, glasses and contact lenses, dental work not covered by dental insurance, and hearing aids. You can also use FSA funds to pay for over-the-counter medications like pain relievers and allergy medicine, though you typically need a prescription or doctor's note for these.

For dependent care, FSA money can pay for daycare, after-school programs, summer camps, and adult day care for an elderly parent or disabled spouse. The dependent care portion of an FSA is capped separately from the medical portion, and the rules about what qualifies are stricter. The expense must allow you or your spouse to work, so you cannot use dependent care FSA funds for activities that happen while you are already at work.

Expenses that do not may have access to include health insurance premiums (with rare exceptions), cosmetic procedures, gym memberships, and over-the-counter items without a prescription. The IRS maintains a detailed list of what counts, and your employer's FSA plan documents will spell out what their specific plan covers.

How much you can contribute and the use-it-or-lose-it rule

For 2024, you can contribute up to $3,300 to a medical FSA and up to $5,000 to a dependent care FSA (these limits change yearly). You choose your contribution amount during open enrollment, and that amount is locked in for the year unless you have a may have access to life event — such as a birth, adoption, marriage, divorce, or loss of other health coverage — that allows you to make changes.

The critical limitation of FSAs is the 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 roll unused money into the next year or cash it out. This is why many people contribute conservatively — you need to estimate how much you will actually spend on may be able to access expenses. Some employers offer a grace period of up to 2.5 months into the next year to spend remaining funds, and a few allow you to carry over up to $610 (as of 2024), but these are optional employer choices, not may provide.

How to use your FSA and submit claims

Most employers provide an FSA debit card that you can use at pharmacies, doctor's offices, and other providers to pay for may be able to access expenses directly. When you swipe the card, the amount is deducted from your FSA balance. Some providers will ask you to verify that the expense is FSA-may be able to access, and you may need to provide a receipt or explanation of benefits from your insurance.

If you do not have a debit card or prefer to pay out of pocket, you can submit a claim by mail or through your FSA administrator's website or app. You will need to provide a receipt showing what you paid for and proof that it is an may be able to access expense. Your FSA administrator will review the claim and reimburse you if it qualifies. Processing typically takes one to two weeks.

Keep all receipts and documentation for at least three years in case your FSA administrator or the IRS asks for proof that you spent the money on may be able to access expenses. If you cannot document an expense, you may have to repay the FSA or face tax penalties.

FSA vs. HSA: which is right for your situation

If your employer offers both an FSA and a Health Savings Account (HSA), you need to understand the differences. An HSA is only available if you are enrolled in a high-deductible health plan, and you can contribute more money to it than an FSA — up to $4,150 for individual coverage in 2024. Unlike an FSA, HSA money rolls over year to year and can be invested, so it functions as a long-term savings tool.

However, an HSA has stricter rules about what you can spend money on, and you cannot use it for dependent care at all. If you have a low-deductible plan, an FSA may be your only option. If you have a high-deductible plan and expect significant medical expenses, an HSA is usually the better choice because the money does not expire. If you have a high-deductible plan but low expected medical costs, you might use an HSA for long-term savings and skip the FSA to avoid the use-it-or-lose-it risk.

Common mistakes to avoid when using an FSA

The most common mistake is overestimating how much you will spend and losing money to the use-it-or-lose-it rule. To avoid this, track your actual medical and dependent care expenses from the previous year and add a small buffer. If you are unsure, contribute less — you can always spend your own money on may be able to access expenses and not use the FSA for everything.

Another mistake is submitting claims for ineligible expenses. Cosmetic procedures, vitamins without a medical condition, and certain over-the-counter items are common culprits. Before you submit a claim, check your plan documents or call your FSA administrator to confirm the expense qualifies. If you submit a claim for an ineligible expense and it is denied, you will have to pay for it out of pocket and cannot get reimbursed.

A third mistake is not keeping receipts or documentation. If your FSA administrator audits your account or the IRS questions your spending, you need proof that the money went to may be able to access expenses. Losing receipts can result in having to repay the FSA or owing taxes on the reimbursement.

When you leave your job or change plans

If you leave your job, you typically have 60 days to submit claims for expenses you incurred while you were enrolled in the FSA. Any unused balance is forfeited — you cannot take it with you or roll it into a new employer's FSA. This is another reason to be conservative with your contribution amount, especially if you think you might change jobs during the year.

If you change jobs and your new employer offers an FSA, you start fresh with a new account and a new contribution limit. You cannot transfer money from your old FSA to your new one. If you move to an HSA at a new job, you also cannot transfer FSA money directly, though you can use remaining FSA funds to pay for may be able to access expenses before the deadline and then start contributing to the HSA.

Frequently Asked Questions

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

Yes, as long as they are claimed as dependents on your tax return or are your spouse. You can use FSA money to pay for their copays, deductibles, prescriptions, and other may be able to access medical expenses. For dependent care, the person must be under age 13 or a disabled dependent or spouse who cannot care for themselves.

What happens if I submit a claim for an ineligible expense?

Your FSA administrator will deny the claim, and you will not be reimbursed. You will have to pay for the expense out of pocket. If you are reimbursed by mistake and the error is discovered later, you may have to repay the FSA or face tax penalties.

Can I change my FSA contribution mid-year?

Only if you have a may have access to life event, such as a birth, adoption, marriage, divorce, or loss of health coverage. A change in your income or a desire to contribute more does not may have access to. You must report the life event to your employer within 30 to 60 days, depending on your plan.

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

The unused money is forfeited and goes back to your employer. Some employers offer a grace period of up to 2.5 months into the next year to spend remaining funds, or allow you to carry over a small amount (up to $610 in 2024), but these are optional. Check your plan documents to see if your employer offers either option.

Can I use my FSA for mental health or therapy?

Yes. Copays and coinsurance for therapy, counseling, and psychiatric care are may be able to access FSA expenses. Prescription medications for mental health conditions also may have access to. However, wellness programs or self-help books do not may have access to unless they are prescribed by a doctor as treatment for a specific condition.