An FSA is a tax-advantaged savings account your employer offers to set aside pre-tax money for medical and dependent care costs

A Flexible Spending Account (FSA) is a benefit account offered through your employer's health plan. You contribute money from your paycheck before taxes are taken out, then use that money to pay for medical expenses and dependent care. The main advantage is that you avoid paying federal income tax, Social Security tax, and Medicare tax on the money you set aside — which typically saves you 20 to 40 percent depending on your tax bracket.

FSAs come in two types: a healthcare FSA (sometimes called a medical FSA) and a dependent care FSA. A healthcare FSA covers medical, dental, and vision costs. A dependent care FSA covers childcare, adult daycare, and similar services. You cannot use one type of account for the other type of expense. Most employers offer the healthcare version, some offer both, and a few offer only dependent care.

The money in your FSA does not belong to your employer — it belongs to you. But there is a catch: you must spend it during the plan year or lose it. This is called the "use-it-or-lose-it" rule, and it is the single most important thing to understand about FSAs.

Key Takeaways

  • FSA money comes out of your paycheck before taxes, which reduces your taxable income and saves you money on federal, Social Security, and Medicare taxes.
  • You choose how much to contribute each year during your employer's open enrollment period, and that amount is deducted from each paycheck throughout the year.
  • You can only spend FSA money on specific medical and dependent care expenses listed in your plan — not on groceries, gym memberships, or most over-the-counter items.
  • Any money left in your FSA at the end of the plan year is forfeited; some employers offer a short grace period or carryover, but most do not.
  • You receive a debit card or reimbursement form to access your FSA funds, and you must keep receipts to prove the expense was covered under your plan.

How much you can contribute and when

You decide how much to contribute to your FSA during your employer's open enrollment period, which usually happens once a year in the fall. The money is then deducted from your paycheck in equal amounts throughout the plan year, which typically runs January through December.

The IRS sets a maximum contribution limit for healthcare FSAs each year. For 2024, the limit is $3,200 per person per year. Dependent care FSAs have a separate limit of $5,000 per household per year. These limits change annually, and your employer will tell you the current limit during enrollment.

You cannot change your contribution amount during the year unless you have a may have access to life event — such as the birth of a child, marriage, divorce, loss of other health coverage, or a significant change in childcare costs. Your employer's benefits office determines whether your situation qualifies.

What you can and cannot buy with FSA money

Healthcare FSA money can pay for copays, coinsurance, deductibles, and out-of-pocket costs for medical, dental, and vision care. This includes doctor visits, prescriptions, eyeglasses, hearing aids, and dental work. It also covers some over-the-counter items — but only if your doctor writes a prescription for them, or if they are on the IRS-approved list (which includes items like bandages, crutches, and blood pressure monitors).

Common items you cannot buy with a healthcare FSA include vitamins, cosmetic procedures, gym memberships, weight-loss programs, and most over-the-counter medications like cold medicine or pain relievers — unless prescribed by a doctor. Dependent care FSA money can only pay for childcare, preschool, adult daycare, and similar services that allow you to work.

Your employer's plan document lists exactly what is covered. If you are unsure whether an expense qualifies, ask your benefits administrator or the FSA plan administrator before you spend the money.

How to access and spend your FSA funds

Most employers give you a debit card linked to your FSA account. You swipe it at the pharmacy, doctor's office, or daycare center just like a regular debit card. The money is deducted from your FSA balance immediately. Some employers instead require you to pay out of pocket and then submit a reimbursement form with receipts to get your money back.

If you use a debit card, keep your receipts anyway. The FSA plan administrator may ask you to prove that the charge was for a covered expense, especially if the merchant category code is unclear (for example, a charge at a drugstore could be for a covered prescription or an uncovered item like shampoo). If you cannot provide proof, you may have to repay the money.

Reimbursement requests typically take one to two weeks to process. You will need to submit the original receipt or an itemized statement showing what you bought and the date. Some employers use an online portal where you upload receipts; others require paper forms mailed to the plan administrator.

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

Any money left in your FSA at the end of the plan year is forfeited — you cannot roll it over to the next year or get it back as a refund. This is a federal rule, not something your employer decided. The money goes back to your employer's health plan to offset costs.

Some employers offer a grace period of up to 2.5 months after the plan year ends during which you can still spend money from the previous year's FSA. Others allow you to carry over up to $640 (as of 2024) into the next year. These are optional employer choices, so check your plan document to see if either applies to you.

Because of this rule, you should estimate your expenses carefully before you contribute. If you overestimate and cannot spend the money, you lose it. If you underestimate, you pay out of pocket for the rest of the year.

FSA versus HSA: which is which

An HSA (Health Savings Account) is different from an FSA, though they are often confused. An HSA is a personal savings account that you own, and the money rolls over year to year — you never lose it. However, you can only open an HSA if you are enrolled in a high-deductible health plan, and your employer may or may not offer one.

An FSA is offered by most employers as part of their standard health benefits, but you do not own the account — your employer does. The money does not roll over. If your employer offers both an HSA and an FSA, you cannot contribute to both in the same year.

If you have access to an HSA, it is usually the better choice because you keep the money forever. But if your employer only offers an FSA, or if you are not may be able to access for an HSA, an FSA is still a valuable way to save on taxes for predictable medical expenses.

Frequently Asked Questions

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

You lose access to the money immediately. FSA accounts are tied to your employer's plan, not to you personally. You cannot transfer the balance to a new employer's FSA or to an HSA. Any unused money is forfeited. If you are leaving your job, spend down your FSA balance before your last day if possible.

Can I use my FSA debit card at any store?

No. The debit card only works at merchants that accept FSA payments — typically pharmacies, doctor's offices, dental offices, and vision centers. It will not work at grocery stores or general retailers, even if they have a pharmacy section. Some online retailers that sell FSA-may be able to access items may accept the card.

Do I need receipts if I use the FSA debit card?

Yes. Keep all receipts. The FSA plan administrator can request proof of purchase at any time, and if you cannot provide it, you may have to repay the amount. This is especially important for purchases at stores that sell both covered and non-covered items.

Can I contribute to an FSA if I am self-employed?

No. FSAs are only available through employer-sponsored health plans. If you are self-employed, you cannot open an FSA. You may be able to open an HSA if you have a high-deductible health plan, or you can set aside pre-tax money for medical expenses through a Solo 401(k) if your business structure allows it.

What if I have a baby during the year — can I increase my FSA contribution?

Yes, the birth of a child is a may have access to life event. You can increase your healthcare FSA contribution to cover additional medical expenses, and you can increase your dependent care FSA contribution to cover childcare for the new baby. You must notify your employer's benefits office within 30 to 60 days of the birth (check your plan for the exact deadline).