A medical spending account is a tax-advantaged savings account that lets you set aside pre-tax money to pay for out-of-pocket medical costs

When you enroll in a Flexible Spending Account (FSA), you choose how much money to deduct from your paycheck before taxes are taken out. That money goes into an account you can then use to pay for medical expenses — copays, deductibles, prescriptions, dental work, vision care, and other costs your health insurance doesn't cover or covers only partially. Because the money comes out before federal income tax, Social Security tax, and Medicare tax are calculated, you pay less in taxes overall.

The account is offered through your employer's benefits plan, not through a government program or insurance company. Your employer sets up the account, and you decide how much to contribute each year during open enrollment. The money you contribute is yours to use, but there are rules about what counts as a medical expense and what happens to money you don't spend.

Key Takeaways

  • Money in a medical spending account comes from your paycheck before taxes, which reduces the total income tax you owe that year.
  • You can use the account to pay for copays, deductibles, prescriptions, dental care, vision care, and other medical expenses your insurance doesn't fully cover.
  • You must choose your contribution amount during your employer's open enrollment period, and that amount is locked in for the plan year.
  • Money you don't spend by the end of the plan year is forfeited — you cannot roll it over or get it back, with limited exceptions for carryover or grace periods your employer may offer.
  • You pay for expenses out of pocket first, then submit receipts and claims to get reimbursed from your account.

How contributions and reimbursement work

You decide on a contribution amount — say $2,500 per year — and that amount is divided across your paychecks. If you're paid every two weeks, roughly $96 comes out of each check and goes into your medical spending account. Because this money is deducted before taxes, you don't pay federal income tax, Social Security tax, or Medicare tax on it. If you're in the 22 percent federal tax bracket, setting aside $2,500 saves you about $550 in taxes that year.

When you have a medical expense, you typically pay for it yourself at the time — you hand your copay to the doctor, you pay the pharmacy for your prescription. Then you submit a claim to the account administrator (usually a third-party company your employer contracts with) along with a receipt or explanation of benefits. The administrator reviews the claim, confirms it's for a covered expense, and reimburses you from your account balance. Some accounts let you use a debit card linked to the account instead, so you don't have to pay upfront and wait for reimbursement.

What expenses you can and cannot pay for

The IRS maintains a list of medical expenses that count as covered under a medical spending account. Covered expenses include copays and coinsurance, deductibles, prescription medications, dental care (fillings, cleanings, orthodontia), vision care (glasses, contacts, exams), hearing aids, mental health treatment, physical therapy, and many over-the-counter items like pain relievers and allergy medicine (though over-the-counter drugs now require a prescription or doctor's note in some cases).

Expenses that do not count include cosmetic procedures, gym memberships, vitamins (unless prescribed by a doctor for a specific condition), and general health products. If you're unsure whether an expense qualifies, your account administrator can tell you before you submit a claim. Keeping receipts and documentation is important — the IRS can audit medical spending account claims, and you'll need proof that the expense was medical and that you paid for it.

The use-it-or-lose-it rule and carryover options

Medical spending accounts operate on a plan year, which is usually the calendar year but may differ depending on your employer. Any money you don't spend by the end of the plan year is forfeited — you lose it. This is called the use-it-or-lose-it rule, and it's one of the biggest differences between a medical spending account and a regular savings account.

However, some employers now offer a carryover option or a grace period. A carryover allows you to roll up to $610 (the amount changes yearly) from one plan year into the next. A grace period gives you an extra 2.5 months after the plan year ends to spend money from the previous year's account. Not all employers offer these, so check your plan documents or ask your benefits administrator what applies to you. If your employer offers neither, you need to estimate carefully how much you'll spend on medical costs in the coming year.

How a medical spending account differs from an HSA

A Health Savings Account (HSA) is similar but not the same. An HSA is also tax-advantaged and lets you set aside pre-tax money for medical expenses. The key difference is that an HSA rolls over year to year — money you don't spend stays in the account and grows. An HSA also requires you to be enrolled in a high-deductible health plan, whereas a medical spending account works with any health insurance plan your employer offers.

An HSA also has higher contribution limits and can be used for more types of expenses. If your employer offers both, an HSA is usually the better choice because you don't lose unused money. But not everyone qualifies for an HSA, and not all employers offer one. A medical spending account is more widely available and works well if you have predictable medical expenses each year.

Choosing the right contribution amount

The hardest part of a medical spending account is deciding how much to contribute. You need to estimate your out-of-pocket medical costs for the coming year — copays, deductibles, prescriptions, dental work, vision care. Look at what you spent in the previous year, factor in any changes (new medications, planned procedures, changes to your insurance plan), and choose a number you're confident you'll spend.

If you contribute too much and don't spend it, you lose the money. If you contribute too little, you'll pay for medical expenses out of pocket with after-tax dollars, which defeats the purpose. Many people contribute $1,000 to $2,500 per year, but the right amount depends entirely on your situation. Your employer may provide a worksheet or calculator to help you estimate. You can only change your contribution amount during open enrollment or if you have a may have access to life event, such as a change in your health insurance plan or a birth in your family.

Frequently Asked Questions

Can I use my medical spending account for my spouse or children?

Yes. You can use the account to pay for medical expenses for yourself, your spouse, and any dependents you claim on your tax return. The expense must be for a covered medical service, and you must have a receipt or proof of payment. The person receiving the care doesn't have to be on your health insurance plan.

What happens to my medical spending account if I leave my job?

When you leave your job, your access to the account ends. You have a limited time (usually 60 to 90 days) to submit claims for expenses you already incurred during the plan year. Any unused balance is forfeited. If you move to a new job with a medical spending account, you start fresh with a new account and a new contribution amount.

Can I get my money back if I don't use it?

No. The use-it-or-lose-it rule means unused money is forfeited at the end of the plan year. Some employers offer a carryover (up to $610 to the next year) or a grace period (2.5 extra months to spend), but these are optional. Check your plan documents to see if your employer offers either option.

Do I need receipts to get reimbursed?

Yes. Your account administrator will ask for a receipt, invoice, or explanation of benefits showing the date, amount, and type of medical service. Keeping organized records is important in case the IRS audits your account. Digital copies are usually acceptable.

Can I use my medical spending account for over-the-counter medications?

Some over-the-counter medications may have access to, but rules changed in 2020. Most over-the-counter drugs now require a prescription or a doctor's note to be covered. Certain items like bandages, crutches, and glucose monitors may still may have access to without a prescription. Ask your account administrator which over-the-counter items are covered before you buy them.