A Flexible Spending Account lets you set aside pre-tax money from your paycheck to pay for medical and dependent care costs

A Flexible Spending Account (FSA) is a workplace benefit that lets you put money into an account before taxes are taken out. You then use that money to pay for certain medical expenses or childcare costs throughout the year. The main advantage is that the money you contribute reduces your taxable income, which can lower what you owe in taxes.

Your employer must offer an FSA for you to have one — you cannot open an FSA on your own. The account is managed through your employer's benefits plan, and you typically enroll during your company's open enrollment period, usually once a year. Once you choose an amount to contribute, that money is deducted from your paycheck in equal installments before income tax and Social Security tax are calculated.

FSAs come in two types: a medical FSA for healthcare costs, and a dependent care FSA for childcare or adult dependent care expenses. Some employers offer both, and you can contribute to each one in the same year, but the money in each account is separate and cannot be moved between them.

Key Takeaways

  • FSA money comes from your paycheck before taxes, which reduces your taxable income and can lower your tax bill.
  • You must enroll during your employer's open enrollment period, and you choose how much to contribute each year.
  • Medical FSAs cover copays, deductibles, prescriptions, and other may have access to medical expenses, but not insurance premiums or over-the-counter items without a prescription.
  • Dependent care FSAs pay for childcare, preschool, or adult day care, but the person receiving care must be claimed as your dependent on your taxes.
  • FSA money must be used by the end of the plan year or you lose it — there is no rollover to the next year, though some plans offer a short grace period.

What a medical FSA covers

A medical FSA pays for may have access to medical expenses that you or your spouse and dependents incur. These include copays and coinsurance when you see a doctor, deductibles you have to meet before insurance kicks in, and prescription medications. You can also use FSA money for dental work, vision care, hearing aids, and mental health treatment.

The IRS maintains a detailed list of what counts as a may have access to expense. Common items include over-the-counter pain relievers and allergy medicine if you have a prescription or a doctor's note, medical equipment like crutches or blood pressure monitors, and therapy or counseling sessions. Expenses must be for medical care — cosmetic procedures do not count unless they are medically necessary, such as reconstructive surgery after an injury.

What does not count: health insurance premiums (including your employer plan premium), long-term care insurance, or most over-the-counter items without a prescription. Gym memberships and general wellness programs are not covered, even if your doctor recommends exercise.

What a dependent care FSA covers

A dependent care FSA pays for childcare or adult dependent care services that allow you to work. This includes daycare centers, in-home babysitters, preschool, after-school programs, and adult day care for an aging parent or disabled spouse. The person receiving care must be someone you claim as a dependent on your tax return, and you must be working or looking for work for the expense to count.

The care does not have to be full-time. If you pay for a babysitter two days a week so you can go to work, that counts. Summer camp is covered only if it is day camp and you use it because you are working; overnight camp does not count. Tuition for kindergarten or higher grades is not covered, even if you need it for childcare purposes.

You cannot use dependent care FSA money to pay a family member under age 19, or a spouse or dependent you claim on your taxes. The IRS has strict rules about who can be paid, so check with your plan administrator before you hire someone.

How much you can contribute and contribution limits

The IRS sets annual limits on how much you can contribute to each type of FSA. For medical FSAs, the limit changes each year — it has been between $2,500 and $3,200 in recent years, but you should check your plan documents or ask your benefits administrator for the current year's limit. For dependent care FSAs, the limit is $5,000 per year for married couples filing jointly and $2,500 for single filers.

You choose your contribution amount during open enrollment, and that amount is locked in for the entire plan year. You cannot change it mid-year unless you have a may have access to life event, such as the birth of a child, a change in your spouse's employment, or a significant change in childcare costs. If you change jobs, your FSA does not move with you — you lose any unused money and must enroll in your new employer's plan if they offer one.

The contribution limit is per person, not per household. If both you and your spouse work and both employers offer FSAs, you can each contribute up to the limit in your own accounts.

How to use your FSA and submit claims

When you incur a may have access to expense, you pay for it out of pocket and then submit a claim to your FSA plan administrator to be reimbursed. Most plans give you a debit card linked to your FSA account, which you can use at pharmacies, doctor's offices, and other healthcare providers. If you use the debit card, the transaction is usually tracked automatically and you do not need to submit a separate claim.

If you pay cash or use your personal credit card, you will need to submit a claim form along with a receipt or explanation of benefits from your provider. The plan administrator reviews the claim to make sure the expense is may have access to, and then sends you a reimbursement check or deposits the money into your bank account. This process typically takes one to three weeks.

Keep all receipts and documentation for at least three years. The IRS can audit FSA claims, and you need proof that the expense was real and may have access to. If you cannot document an expense, you may have to repay the reimbursement.

The "use it or lose it" rule and grace periods

FSA money must be used by the end of your plan year or you forfeit it. This is called the "use it or lose it" rule, and it is one of the biggest drawbacks of FSAs. If you contribute $2,000 and only spend $1,500, you lose the remaining $500 — your employer cannot return it to you, and you cannot roll it over to next year.

Some employers offer a grace period of up to 2.5 months after the plan year ends, during which you can still submit claims for expenses you incurred during the plan year. This gives you a little extra time to use up your balance, but not much. A few employers offer a carryover option instead, which lets you roll up to $610 (the amount changes yearly) into the next plan year, but this is less common and your employer must specifically choose to offer it.

Because of this rule, many people contribute a conservative amount to their FSA — enough to cover expenses they are confident they will have, but not so much that they risk losing money. Talk to your benefits administrator about your plan's grace period and carryover rules before you decide how much to contribute.

FSA vs. Health Savings Account: key differences

FSAs are sometimes confused with Health Savings Accounts (HSAs), but they work differently. An HSA is only available if you have a high-deductible health plan, and the money rolls over year to year — you do not lose it. HSAs also allow you to invest the money and earn interest, which FSAs do not. However, HSAs have lower contribution limits than medical FSAs in most years.

Both FSAs and HSAs use pre-tax money and both cover the same may have access to medical expenses. The main trade-off is flexibility: an FSA has higher contribution limits but you lose unused money, while an HSA has lower limits but the money is yours to keep. If your employer offers both, you can only contribute to an HSA, not an FSA, in the same year.

Some employers offer an FSA alongside a regular health insurance plan (not high-deductible), which is a common setup. In that case, you can only use an FSA, not an HSA.

Frequently Asked Questions

Can I change my FSA contribution amount during the year?

No, unless you have a may have access to life event. These include birth or adoption of a child, marriage or divorce, death of a spouse or dependent, significant change in childcare costs, or loss of health coverage. You must request the change within 30 to 60 days of the event, depending on your plan. Contact your benefits administrator to find out what counts as may have access to.

What happens to my FSA if I leave my job?

You lose access to your FSA account immediately or at the end of your employment, depending on your employer's policy. Any unused money is forfeited. You may be able to continue coverage under COBRA, which lets you keep the FSA for a limited time, but you have to pay the full premium yourself. If your new employer offers an FSA, you can enroll during their open enrollment period.

Can I use my FSA for my spouse's medical expenses?

Yes, if your spouse is claimed as your dependent on your tax return. You can use your medical FSA to pay for your spouse's copays, prescriptions, and other may have access to medical expenses. The same rule applies to any dependent you claim on your taxes.

Do I need to submit receipts for every FSA claim?

If you use your FSA debit card, most transactions are tracked automatically and you do not need to submit a receipt. However, some providers may ask for documentation later. If you pay out of pocket and submit a claim form, you must include a receipt or explanation of benefits. Keep all documentation for at least three years in case of an audit.

Can I use my dependent care FSA for after-school programs?

Yes, if the program is necessary because you are working. After-school care, summer day camp, and preschool all count. However, tuition for school itself does not count, even if you need childcare to work. The care must be for a dependent you claim on your taxes, and you cannot pay a family member under age 19 or your spouse.