A health FSA is an account where you set aside pre-tax money from your paycheck to pay for medical expenses your insurance doesn't cover

A health 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 medical costs — copays, deductibles, prescriptions, dental work, vision care, and other out-of-pocket expenses. Because the money goes in before federal income tax and payroll taxes are applied, you pay less in taxes overall.

Your employer sets up the FSA through a third-party administrator, usually a benefits company. You choose how much to contribute each year during your employer's open enrollment period, typically in the fall. That amount is divided into equal chunks and taken from your paycheck throughout the year. You then submit receipts or use a debit card tied to the account to withdraw money for medical expenses.

The key difference between an FSA and just paying medical bills out of pocket: if you spend $2,000 on medical costs and put $2,000 into an FSA, you save money because that $2,000 is not subject to federal income tax or Social Security and Medicare taxes. The exact tax savings depends on your tax bracket, but for most people it amounts to 20 to 40 percent of what they contribute.

Key Takeaways

  • You contribute pre-tax money to an FSA through payroll deduction, which lowers your taxable income and the taxes you owe.
  • You can use FSA money for copays, deductibles, prescriptions, dental, vision, and other medical expenses your insurance does not cover.
  • Money left in your FSA at the end of the year is forfeited — you cannot carry it over to the next year, with rare exceptions.
  • You must be enrolled in your employer's health insurance plan to open an FSA, and you can only change your contribution during open enrollment or after a may have access to life event.

What medical expenses you can pay for with FSA money

The IRS maintains a list of approved medical expenses. Common ones include copays and coinsurance, deductibles, prescription medications, insulin and diabetes supplies, dental cleanings and fillings, eyeglasses and contact lenses, hearing aids, and physical therapy. Over-the-counter items like pain relievers, allergy medicine, and antacids are also covered, though you typically need a prescription or doctor's note for them.

Some expenses are not covered. Cosmetic procedures, gym memberships, vitamins without a medical condition, and most over-the-counter items without a prescription are off-limits. Long-term care insurance and health insurance premiums are also excluded, though there are narrow exceptions for COBRA premiums and certain other situations.

The safest approach is to keep receipts for everything and ask your FSA administrator or your employer's benefits team if you are unsure about a specific expense. Many FSA debit cards now flag questionable purchases and ask for documentation before approving them.

How much you can contribute and when

The IRS sets an annual limit on FSA contributions. For 2024, the limit is $3,200 per person. Your employer may set a lower limit, so check your plan documents. You choose your contribution amount during open enrollment, usually in October or November, and that amount is locked in for the entire calendar year.

You can only change your contribution outside of open enrollment if you have a may have access to life event: marriage, divorce, birth or adoption of a child, loss of other health coverage, or a significant change in your spouse's benefits. You must request the change within 30 to 60 days of the event, depending on your employer's rules.

If you leave your job mid-year, you can usually continue using your FSA through the end of the calendar year, but you cannot add more money. Some employers allow you to move the remaining balance to a different account type, but this is not may provide.

The use-it-or-lose-it rule and what happens to leftover money

Money in your FSA must be spent by December 31 of the plan year or it is forfeited. This is called the use-it-or-lose-it rule. If you contribute $2,000 and spend only $1,500, the remaining $500 disappears. Your employer cannot return it to you, and you cannot roll it over to next year.

Some employers offer a grace period — usually 2.5 months into the next year — during which you can spend money from the previous year's FSA. A smaller number of employers allow you to carry over up to $610 (the 2024 limit) into the next year. Check your plan documents to see if either option applies to you.

Because of this rule, most people contribute conservatively. A common strategy is to estimate your out-of-pocket medical costs for the year, subtract any predictable expenses like annual copays, and contribute that amount. If you are unsure, contributing less is safer than contributing more and losing money.

How to use your FSA money

Most FSAs issue a debit card that you can use at pharmacies, doctors' offices, and other medical providers. When you swipe the card, the transaction is flagged for review. The administrator may ask you to submit a receipt or explanation of benefits to confirm the expense is FSA-may be able to access.

If your FSA does not issue a debit card, or if a provider does not accept it, you can pay out of pocket and then submit a claim for reimbursement. You will need to provide a receipt showing what you paid for and proof that it is a medical expense — usually an explanation of benefits from your insurance or an itemized receipt from the provider. Reimbursement typically takes one to two weeks.

Keep all receipts and documentation for at least three years. The IRS can audit FSA claims, and your employer or the FSA administrator may request proof that you spent the money on may be able to access expenses.

Who can open an FSA and what you need to know before enrolling

You must be employed by a company that offers an FSA and enrolled in one of the employer's health insurance plans. Self-employed people and employees of very small companies usually cannot open an FSA through their employer, though some may be able to open a Self-Employed Health Insurance Deduction or a different type of savings account.

You cannot have both an FSA and a Health Savings Account (HSA) in the same year. If your employer offers both, you must choose one. HSAs have different rules and allow you to carry money over year to year, making them a better long-term savings tool for some people. FSAs are better if you have predictable medical expenses each year and want an immediate tax break.

Once you enroll in an FSA, you are locked in for the entire year. You cannot change your contribution amount or cancel the account unless you have a may have access to life event or your employer ends the plan. This is why estimating your medical costs carefully during enrollment is important.

FSA claims and documentation

When you submit a claim for reimbursement, you will need to provide the date of service, the name of the provider or pharmacy, the amount paid, and a description of the service or item. An explanation of benefits from your insurance, a pharmacy receipt, or an itemized invoice from your doctor's office usually satisfies this requirement.

Some FSA administrators use a "substantiation" process where they randomly request documentation for debit card purchases. If you cannot provide proof within a set timeframe — usually 30 to 60 days — the money is deducted from your account. This is another reason to keep receipts.

If you dispute a claim denial, contact your FSA administrator first. They can explain why the expense was not covered and tell you whether you can appeal. If you believe the denial is wrong, you may also contact your employer's benefits team or file a complaint with your state's insurance commissioner.

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, even if they are not covered under your employer's health insurance plan. You just need to keep receipts showing the expense was for a family member.

What happens to my FSA if I get laid off or quit my job?

You can usually continue using your FSA through the end of the calendar year, even if you leave your job. However, you cannot add more money after you stop working. Some employers allow you to move the balance to a different account or extend access, so contact your benefits administrator before you leave.

Can I use FSA money for dental or vision care?

Yes. Dental cleanings, fillings, orthodontia, and vision exams, glasses, and contacts are all FSA-may be able to access. You can use FSA money even if you have separate dental or vision insurance through your employer.

Is there a penalty if I contribute too much to my FSA?

No penalty, but you lose the money. If you contribute more than you spend by December 31, the leftover amount is forfeited. This is why it is important to estimate conservatively and review your plan's grace period and carryover rules.

Can I change my FSA contribution mid-year?

Only if you have a may have access to life event like marriage, birth, adoption, divorce, or loss of health coverage. You must request the change within 30 to 60 days of the event. Outside of these circumstances, your contribution is locked in for the entire year.