An FSA is a savings account your employer offers that lets you set aside pre-tax money for medical expenses

A Flexible Spending Account (FSA) is an account funded with your own money — not your employer's — but the money goes in before taxes are taken out. You decide how much to contribute each year, up to a limit set by the IRS. When you need to pay for a covered medical expense, you withdraw from the account to pay for it. Because the money never gets taxed, you spend less of your paycheck overall.

The catch is that FSAs are "use it or lose it" — money you don't spend by the end of the plan year generally stays with your employer. Some plans offer a small grace period or let you carry over a limited amount, but most don't. This makes FSAs different from a regular savings account, where unused money is always yours.

FSAs are only available through an employer. If you're self-employed or your employer doesn't offer one, you can't open an FSA. You can only sign up during your employer's open enrollment period, which is usually once a year, or when you have a may have access to life event like getting married or having a child.

Key Takeaways

  • An FSA lets you set aside pre-tax money through your paycheck to pay for medical expenses, reducing the amount of income tax you owe.
  • You choose how much to contribute each year, up to the IRS limit, which changes annually but is typically around $3,200 for individual coverage.
  • Money left unspent at the end of the plan year is forfeited, so you need to estimate carefully what you'll actually use.
  • FSAs are only available through employers and can only be opened during open enrollment or after certain life changes.
  • Covered expenses include copays, deductibles, prescription medications, and many other medical costs, but not health insurance premiums or over-the-counter items without a prescription.

How the money flows in and out

You contribute to your FSA through payroll deduction. Your employer takes the money from your paycheck before calculating your federal income tax, Social Security tax, and Medicare tax. This means if you contribute $2,000 to an FSA, your taxable income drops by $2,000, so you pay less in taxes overall.

When you have a medical expense, you submit a claim to the FSA administrator (usually a third-party company your employer hires). You'll need to provide a receipt or explanation of benefits showing what you paid for. The administrator then reimburses you from your FSA balance. Some FSAs issue a debit card that you can use directly at pharmacies or medical offices, which skips the reimbursement step.

The money in your FSA account is yours to use — your employer doesn't own it. But if you leave your job, you generally lose access to the remaining balance. Some employers allow you to continue using the FSA for a short period after you leave, but this varies widely.

What expenses are covered

FSAs cover a broad range of medical costs. Copays and coinsurance for doctor visits, dental work, and vision care all count. Prescription medications, deductibles, and medical equipment like crutches or blood pressure monitors are covered. You can also use FSA money for things like acupuncture, mental health counseling, and certain over-the-counter items if you have a prescription from a doctor.

What's not covered: health insurance premiums, cosmetic procedures, and most over-the-counter medications without a prescription. Vitamins and supplements are generally not covered unless prescribed by a doctor for a specific medical condition. The IRS publishes a detailed list, and your plan administrator can tell you whether a specific expense qualifies.

The contribution limit and how much to set aside

The IRS sets an annual limit on how much you can contribute to an FSA. This limit changes each year. You'll see the current year's limit in your employer's open enrollment materials. The limit applies to the calendar year, so contributions reset on January 1.

Deciding how much to contribute is the hardest part of using an FSA. You need to estimate what you'll actually spend on medical expenses in the coming year. If you contribute too much, you'll lose the unspent money. If you contribute too little, you miss out on the tax savings. Look at what you spent in the previous year, factor in any changes (new prescriptions, planned dental work, a new baby), and be conservative. It's better to contribute less and not lose money than to over-contribute and forfeit it.

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

At the end of your plan year, any money left in your FSA is forfeited. You don't get it back, and it doesn't roll over to the next year. This is the biggest risk of using an FSA. If you contribute $2,500 and only spend $1,800, you lose $700.

Some employers offer a grace period — usually two and a half months after the plan year ends — during which you can still spend down your FSA balance. Others allow you to carry over up to $610 (this limit also changes annually) into the next year. Check your plan documents to see which option your employer offers. If your plan offers neither, you need to be especially careful about how much you contribute.

FSA vs. HSA: when to choose each

If your employer offers both an FSA and a Health Savings Account (HSA), you need to pick one — you can't have both in the same year. An HSA is only available if you're enrolled in a high-deductible health plan. Unlike an FSA, an HSA lets you carry over unused money year to year, and you can invest it. HSAs also offer tax advantages on withdrawals.

Choose an FSA if you expect to spend a lot on medical expenses this year and want to use the tax savings now. Choose an HSA if you have a high-deductible plan, expect lower medical spending, and want to build up savings over time. Some people use an HSA as a retirement account once they've covered their current medical expenses, since HSA withdrawals for non-medical expenses are taxed after age 65.

How to sign up and when enrollment happens

You sign up for an FSA during your employer's open enrollment period, which typically happens once a year in the fall for coverage starting January 1. You'll receive materials from your employer or benefits administrator explaining the plan, the contribution limit, and what's covered. You choose your contribution amount and submit your election through your employer's benefits portal or by paper form.

If you have a may have access to life event — marriage, divorce, birth of a child, loss of other health coverage, or a change in your employment status — you may be able to sign up outside of open enrollment. You usually have 30 to 60 days after the event to make changes. Contact your employer's benefits department to find out what counts as a may have access to event at your company.

Frequently Asked Questions

What happens to my FSA money if I quit my job?

You lose access to the remaining balance. Some employers allow a short continuation period (usually 60 to 90 days) to submit claims for expenses you incurred before you left, but the money itself stays with your employer. This is one reason to be conservative when choosing how much to contribute.

Can I use my FSA for my spouse or children?

Yes. You can use FSA money to pay for medical expenses for your spouse and any dependent children, even if they're not on your health insurance plan. The expense just needs to be a covered medical cost.

Do I need receipts to get reimbursed?

Yes. Your FSA administrator will ask for proof of the expense — a receipt, invoice, or explanation of benefits from your provider. If you use an FSA debit card, the administrator may verify expenses automatically, but you should keep receipts in case they ask for documentation later.

Can I change my FSA contribution during the year?

Only if you have a may have access to life event. Otherwise, your contribution amount is locked in for the entire plan year. This is why it's important to estimate carefully during open enrollment.

What if my plan offers a grace period — can I spend FSA money after the year ends?

If your employer's plan includes a grace period, yes — you can submit claims for expenses incurred during the grace period (usually through mid-March) even though the plan year ended December 31. Check your plan documents to see if this applies to you.