What Flexible Spending Is

Flexible Spending is a way to set aside pre-tax money from your paycheck to pay for medical or dependent care costs that your health insurance doesn't cover. You choose how much to contribute each year, and that money sits in an account you draw from when you have an out-of-pocket expense. The main advantage is that the money you put in reduces your taxable income — so you pay less in federal income tax and Social Security tax.

Your employer must offer a Flexible Spending Account (FSA) for you to have one. You cannot open one on your own. The account exists only during the calendar year you set it up for, and any money you don't spend by the end of that year is forfeited — you cannot roll it over to the next year or get it back as a refund.

Key Takeaways

  • Flexible Spending reduces your taxable income because contributions come from your paycheck before taxes are calculated.
  • You must choose your contribution amount during your employer's open enrollment period, usually in the fall, and the amount is locked in for the full calendar year.
  • Money left unspent at the end of the year is forfeited — there is no carryover to the next year except in rare cases where your employer offers a grace period.
  • You can use Flexible Spending funds only for specific medical expenses and dependent care costs that your insurance does not cover.
  • You pay for the expense out of pocket first, then submit a receipt and claim form to your FSA administrator to be reimbursed.

How Much You Can Contribute

The IRS sets an annual limit on how much you can put into a Flexible Spending Account. For 2024, the limit is $3,300 for a medical FSA and $5,000 for a dependent care FSA. These limits change each year, and your employer will tell you the current limit during open enrollment.

You decide the amount when you enroll, and it comes out of your paycheck in equal installments throughout the year. If you have a may have access to life event — such as a birth, adoption, marriage, divorce, or loss of other coverage — you can change your contribution amount outside of open enrollment. Without a may have access to event, you are locked into your chosen amount for the entire year.

What You Can Pay For With Medical FSA Funds

A medical FSA covers out-of-pocket costs that your health insurance plan does not pay for. This includes copayments, coinsurance, and deductibles. You can also use it for prescription medications, over-the-counter medications (with a prescription from your doctor), dental work, vision care, hearing aids, and mental health treatment.

The IRS maintains a detailed list of what counts as a medical expense. Common items include insulin, allergy medication, pain relievers, antacids, and topical creams — but only if you have a prescription. Items like vitamins, cosmetics, and toiletries do not count unless they treat a specific medical condition and you have a doctor's prescription.

Expenses for your spouse and dependents count too, even if they are not covered under your health insurance plan. You do not have to be the one receiving the care — you just have to be paying for it.

What You Can Pay For With Dependent Care FSA Funds

A dependent care FSA covers the cost of childcare or adult daycare so that you and your spouse can work or look for work. This includes daycare centers, in-home babysitters, preschool, and after-school programs. It also covers adult day programs for an elderly parent or disabled spouse if that person lives with you and you claim them as a dependent.

The care must be for a child under age 13 or a dependent adult who cannot care for themselves. Summer camp counts only if it is day camp, not overnight camp. Tuition for kindergarten and above does not count, but before-school and after-school care does.

You cannot use dependent care FSA funds to pay for school tuition, overnight camps, or care provided by your spouse or a dependent you claim on your taxes.

How to Use Your FSA and Get Reimbursed

When you have a medical or dependent care expense, you pay for it yourself using your personal money or a credit card. You then submit a claim to your FSA administrator — the company your employer hired to manage the account. The claim includes a receipt or invoice showing what you paid for and when.

Most FSA administrators let you submit claims online through a website or mobile app. Some still accept paper claim forms mailed in. The administrator reviews your claim to make sure the expense is allowed, and if it is, they reimburse you within one to two weeks. Some FSAs issue a debit card that you can use at pharmacies and medical offices, which speeds up the process because you do not have to submit a claim.

Keep all receipts and documentation for at least three years in case your employer or the IRS asks to verify your expenses.

The Use-It-or-Lose-It Rule and Grace Periods

Any money left in your FSA at the end of the calendar year is forfeited. You cannot carry it over to the next year, and you cannot get it back as a refund. This is called the use-it-or-lose-it rule, and it is a major reason to think carefully about how much to contribute.

Some employers offer a grace period — usually 2.5 months into the next year — during which you can still spend money from the previous year's account. Not all employers offer this, so check your plan documents or ask your benefits administrator. A few employers also offer a carryover of up to $610 (for 2024) to the next year, but this is rare.

Because of this rule, most people contribute a conservative amount — enough to cover predictable expenses like copayments and prescriptions, but not so much that they risk losing money.

Frequently Asked Questions

Can I use my FSA debit card at any pharmacy or doctor's office?

Not always. FSA debit cards work at most pharmacies and medical providers, but some smaller offices or specialists may not accept them. If the card is declined, you pay out of pocket and submit a claim with your receipt. The administrator will reimburse you once they verify the expense is allowed.

What happens to my FSA if I leave my job?

Your FSA ends when you leave your employer. You have until the end of the calendar year to submit claims for expenses you already incurred, but you cannot contribute new money or use the account after your employment ends. Some employers let you continue the account through COBRA, but this is uncommon for FSAs.

Can I have both a medical FSA and a Health Savings Account?

No. If you have a medical FSA, you cannot also have an HSA in the same year. However, you can have a dependent care FSA and an HSA at the same time. Check with your employer about which accounts are available under your plan.

Do I need receipts to prove my FSA expenses?

Yes. Your FSA administrator will ask for a receipt or invoice showing the date, amount, and type of expense. Keep these documents for at least three years. Some administrators may ask for additional proof, such as a prescription or explanation of benefits from your insurance.

Can I change my FSA contribution amount during the year?

Only if you have a may have access to life event, such as a birth, adoption, marriage, divorce, or change in your spouse's employment or insurance. A change in your income or a change of mind about how much you need does not count. Contact your benefits administrator to report a may have access to event.