A healthcare FSA lets you set aside pretax money from your paycheck to pay for medical expenses your insurance doesn't cover

A healthcare Flexible Spending Account (FSA) is an employer-sponsored account where you contribute money before taxes are taken out. You then use that money to pay for out-of-pocket medical costs — copays, deductibles, prescription drugs, dental work, vision care, and other may have access to expenses. The money you put in reduces your taxable income for the year, which lowers what you owe in federal income tax and payroll taxes.

The account is "flexible" because you choose how much to contribute each year (within limits set by your employer and federal law), and you decide when and how to spend it. You are not required to use it for any particular type of care. The catch: money you don't spend by the end of the plan year is forfeited — you cannot roll it over to the next year or get it back as a refund.

Key Takeaways

  • You contribute pretax money through payroll deductions, which reduces both your federal income tax and Social Security taxes for that year.
  • You can use FSA funds to pay for copays, deductibles, prescription drugs, dental care, vision care, and other medical expenses your insurance does not cover.
  • Money left unspent at the end of the plan year is forfeited; most plans do not allow you to carry the balance forward.
  • You enroll during your employer's open enrollment period, usually once per year, and your contribution amount stays fixed unless you have a may have access to life event.
  • You access the money through a debit card, reimbursement form, or direct payment to providers, depending on how your plan is set up.

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

For 2024, the federal limit for healthcare FSA contributions is $3,200 per year. Your employer may set a lower limit. You contribute the money through automatic payroll deductions spread across your pay periods, so the amount comes out before federal income tax, Social Security tax, and Medicare tax are calculated.

The actual tax savings depend on your tax bracket and state taxes. If you contribute $2,400 to an FSA and you are in the 22% federal tax bracket, you save roughly $528 in federal taxes alone. If your state has income tax, you save on that too. The savings are real, but they only work if you actually spend the money — unspent funds are lost.

What expenses you can and cannot pay for with FSA funds

FSA funds cover most medical, dental, and vision expenses that are not covered by insurance. Common covered expenses include copays, coinsurance, deductibles, prescription medications, dental cleanings and fillings, eyeglasses and contact lenses, hearing aids, and over-the-counter medications (with a doctor's prescription). Some plans also cover acupuncture, chiropractic care, and mental health counseling.

Expenses that do not may have access to include cosmetic procedures (unless medically necessary), gym memberships, vitamins and supplements (unless prescribed by a doctor), and health insurance premiums themselves. Toiletries, sunscreen, and general wellness products are not covered. Your employer's plan document lists the specific expenses your plan covers, so check that before you assume something is may be able to access.

When you enroll and how to use the money

You enroll in an FSA during your employer's open enrollment period, which typically happens once per year in the fall for coverage starting January 1. If you are a new employee, you usually have 30 to 60 days from your hire date to enroll. You cannot change your contribution amount during the year unless you have a may have access to life event — marriage, divorce, birth of a child, loss of other health coverage, or a significant change in expenses.

Once enrolled, you access your FSA funds through one of three methods: a debit card issued by the plan administrator (the fastest option), a reimbursement form you submit with receipts, or direct payment to providers if they are set up with your plan. Keep receipts for all expenses you pay with FSA funds, because the plan administrator may ask for proof that the expense was may have access to.

The use-it-or-lose-it rule and grace periods

Money you do not spend by December 31 (or the end of your plan year if your employer uses a different calendar) is forfeited. This is the biggest drawback of an FSA. You cannot roll unused funds into the next year, and you cannot get a refund. Some employers offer a grace period of up to 2.5 months after the plan year ends, during which you can still submit claims for expenses incurred in the prior year. Check your plan documents to see if your employer offers this.

Because of this rule, estimate conservatively. If you are unsure whether you will spend $2,500, contribute $1,500 instead. It is better to leave some tax savings on the table than to lose money you have already set aside. Track your medical expenses throughout the year so you know how much you are actually spending.

FSA versus HSA: when to choose each

If your employer offers both an FSA and a Health Savings Account (HSA), they work differently. An HSA is only available if you are enrolled in a high-deductible health plan (HDHP). Unlike an FSA, HSA money rolls over year to year and can be invested. However, HSAs have lower annual contribution limits ($4,150 for individual coverage in 2024) and stricter rules about what you can spend on.

If your employer offers both, you cannot enroll in both at the same time. If you have an HDHP and expect high medical expenses, an HSA is usually better because the money does not expire. If you have a standard health plan and want to reduce your taxes on predictable medical costs, an FSA makes sense. If you are unsure which plan your health insurance is, check your insurance card or call your insurer.

What happens to your FSA if you leave your job

When you leave your employer, your FSA account closes. You can no longer contribute to it, but you can usually submit claims for expenses you incurred while you were employed, as long as you submit them within a set deadline (often 60 to 90 days after your last day). Money you have not yet spent is forfeited.

If you move to a new job with an FSA, you start fresh with a new account and a new contribution limit. You cannot transfer your old FSA balance to the new one. Some employers allow you to continue FSA coverage through COBRA (Consolidated Omnibus Budget Reconciliation Act) for a limited time after you leave, but you pay the full premium yourself, which is usually expensive and defeats the tax-savings purpose.

Frequently Asked Questions

Can I use my FSA debit card for anything, or only medical expenses?

The debit card is restricted to may have access to medical expenses. If you try to use it for groceries or gas, the transaction will be declined. Some cards require you to submit a receipt to prove the expense was medical. Keep all receipts in case the plan administrator asks for documentation.

What if I contribute too much and do not spend it all?

The money is forfeited at the end of the plan year. There is no refund, no rollover, and no way to get it back. This is why it is important to estimate carefully. If you have a grace period, you can submit claims for prior-year expenses during that window, which sometimes helps recover some of the balance.

Can I change my FSA contribution amount if my medical expenses go up?

No, unless you have a may have access to life event such as marriage, birth of a child, loss of other coverage, or a significant change in your health or expenses. Open enrollment happens once per year, usually in the fall. If you miss the window and do not have a may have access to event, you are locked in until next year.

Do I need receipts to use my FSA?

Yes. Keep receipts for all FSA expenses. The plan administrator may ask for proof that an expense was may have access to, especially if you use the reimbursement form method. If you use the debit card, some transactions are automatically verified, but you should still keep receipts for your records.

Can I use FSA money for my spouse or children?

Yes, as long as they are your tax dependents. You can use FSA funds to pay for their medical, dental, and vision expenses. The money does not have to be used only for your own care.