A Flex Account Lets You Set Aside Pre-Tax Money for Medical and Dependent Care Costs

A Flexible Spending Account (FSA), sometimes called a flex account, is a workplace benefit that lets you put money into a special account before taxes are taken out of your paycheck. You then use that money to pay for medical expenses or dependent care costs that your health insurance doesn't cover. The main advantage is that the money you put in reduces your taxable income for the year, which typically saves you money on federal income taxes.

FSAs are offered by employers as part of their benefits package — you cannot open one on your own. Your employer sets up the account through a plan administrator, and you decide how much to contribute each year during your company's open enrollment period. The money comes out of your paycheck automatically throughout the year, and you can withdraw it to pay for covered expenses whenever you need to.

There are two main types of FSAs: a medical FSA (sometimes called a healthcare FSA) and a dependent care FSA. A medical FSA covers out-of-pocket medical, dental, and vision expenses. A dependent care FSA covers costs for childcare or adult daycare that allows you to work. You can have both types at the same time if your employer offers them.

Key Takeaways

  • An FSA is a workplace account where you contribute pre-tax money to pay for medical or dependent care expenses that insurance doesn't cover.
  • You choose how much to contribute each year during open enrollment, and the money is deducted from your paycheck before taxes.
  • Medical FSAs and dependent care FSAs serve different purposes and have different contribution limits set by the IRS each year.
  • FSA money must be used within the plan year or you lose it — there is no rollover to the next year, though some plans offer a grace period or carryover of up to $610.
  • You pay for covered expenses out of pocket first, then request reimbursement from your FSA account or use a debit card linked to the account.

How Much You Can Contribute to an FSA

The IRS sets a maximum contribution limit for medical FSAs each year. For 2024, the limit is $3,200 per person per year. For dependent care FSAs, the limit is $5,000 per household per year (or $2,500 if you are married and file taxes separately). These limits change annually, and your employer will tell you the current limit during open enrollment.

You decide how much to contribute based on what you expect to spend on covered expenses during the year. The money is divided evenly across your paychecks, so if you contribute $2,400 to a medical FSA and get paid twice a month, about $100 comes out of each paycheck. You cannot change your contribution amount during the year unless you have a may have access to life event, such as a change in your family status, loss of other insurance, or a significant change in childcare costs.

What Expenses an FSA Covers

A medical FSA covers a wide range of out-of-pocket healthcare costs. This includes copays and coinsurance for doctor visits, prescription medications, dental work, eyeglasses and contact lenses, hearing aids, and medical equipment like crutches or blood pressure monitors. It also covers some over-the-counter items, though the rules changed in 2020 — most over-the-counter medications now require a prescription to be covered, but items like bandages, pain relief patches, and antacids are still covered without a prescription.

A dependent care FSA covers costs for childcare or adult daycare that you pay for so you can work. This includes daycare centers, in-home babysitters, preschool, and after-school programs. It does not cover overnight camps, tuition for school (even if the school provides childcare), or care for a spouse. The person or facility providing care must have a tax ID number or Social Security number, which your employer will ask you to provide.

Both types of FSA have detailed lists of covered and non-covered expenses. Your employer or plan administrator can give you the full list, and you can also find information on the IRS website. If you are unsure whether something is covered, ask your plan administrator before you pay for it.

The Use-It-or-Lose-It Rule and How to Avoid Losing Money

The most important thing to understand about an FSA is the use-it-or-lose-it rule: any money you do not use by the end of the plan year is forfeited. You cannot carry the balance into the next year, and you cannot get a refund. This is why many people are cautious about how much they contribute — if you overestimate your expenses, you could lose money.

However, there are two ways to protect yourself. Some employers offer a grace period, which gives you an extra 2.5 months (usually until March 15) to use the money from the previous year. Other employers offer a carryover, which lets you roll up to $610 (as of 2024) of unused medical FSA money into the next year. Your plan may offer one, both, or neither — check with your employer to see what applies to you. Dependent care FSAs do not have a carryover option, though some plans offer a grace period.

To avoid losing money, track your medical and dependent care spending throughout the year. Many plan administrators provide a mobile app or online portal where you can see your balance and submit reimbursement requests. If you realize in November that you have money left over, you can schedule dental work, buy glasses, or stock up on covered over-the-counter items before the year ends.

How to Use Your FSA Money

There are two ways to access your FSA funds. The first is to pay for an expense out of pocket and then request reimbursement from your plan administrator. You submit a claim form (usually online) along with a receipt or explanation of benefits from your provider, and the plan administrator sends you a check or deposits money into your bank account. This typically takes one to two weeks.

The second way is to use a debit card linked to your FSA account. Some employers provide this automatically; others require you to request one. When you use the card at a pharmacy, doctor's office, or other provider, the money comes directly from your FSA. This is faster than requesting reimbursement, but the card only works at merchants that are set up to accept FSA payments. You cannot use an FSA debit card at a grocery store or gas station, even if you are buying over-the-counter medical items.

Keep all receipts and documentation for at least three years. Your plan administrator may ask you to prove that expenses were covered and may be able to access, especially if you use the debit card. If you cannot provide proof, you may have to repay the money from your personal funds.

FSA vs. Other Tax-Advantaged Accounts

An FSA is different from a Health Savings Account (HSA), even though both are tax-advantaged accounts for medical expenses. An HSA is only available if you have a high-deductible health insurance plan, and you can carry unused money forward to the next year without losing it. An FSA does not require a specific type of insurance, but you lose unused money at the end of the year (unless your plan offers a grace period or carryover).

A Commuter Benefit Account is another workplace account that works similarly to an FSA but is used for transit and parking costs. Some employers offer all three types of accounts, and you can participate in more than one at the same time.

If you are self-employed or your employer does not offer an FSA, you cannot open one. Self-employed people can deduct medical expenses on their tax return, but the rules are different and the tax savings are usually smaller.

What Happens to Your FSA When You Leave Your Job

If you leave your job, you lose access to your FSA immediately. Any unused money in the account is forfeited — your employer does not have to return it to you, even if you contributed it. This is true whether you resign, are laid off, or are fired. The only exception is if you are laid off or your hours are reduced and you lose your health insurance; in that case, you may be able to use COBRA to continue your FSA for a limited time, though you have to pay the full cost yourself.

Because of this, many people reduce their FSA contributions in their final months of employment or avoid contributing to a dependent care FSA if they think they might change jobs. If you are planning to leave your job, ask your plan administrator how much time you have left in the plan year and whether you can adjust your contribution before you go.

Frequently Asked Questions

Can I use my FSA for my spouse or children?

Yes, you can use your medical FSA to pay for covered expenses for your spouse and any dependent children, even if they are not on your health insurance plan. For a dependent care FSA, the care must be for a child or adult who allows you to work, so you cannot use it to pay for your spouse's care unless they are disabled and need supervision while you work.

What happens if I submit a reimbursement request for an expense that is not covered?

Your plan administrator will deny the claim and send it back to you. You will not receive the money, and the funds remain in your FSA account. If you have already paid out of pocket, you cannot get that money back — you have to absorb the cost yourself.

Can I change my FSA contribution during the year?

No, unless you have a may have access to life event such as marriage, divorce, birth of a child, loss of other insurance, or a significant change in childcare costs. You must request the change within 30 to 60 days of the event (rules vary by employer). Outside of these events, you are locked into your contribution for the entire plan year.

Do I have to pay taxes on FSA reimbursements?

No. FSA reimbursements are not taxable income. The tax savings come from the fact that you contributed the money before taxes were taken out of your paycheck. Once you use the money for a covered expense, there is no additional tax.

What if my employer changes or cancels the FSA plan?

If your employer cancels the plan mid-year, you typically have until the end of the plan year to use any remaining balance. Some employers may allow you to extend the deadline. Ask your plan administrator what happens to your account if the plan is terminated.