An FSA is a tax-advantaged savings account for medical and dependent care costs

A Flexible Spending Account (FSA) is a savings account your employer offers that lets you set aside pre-tax money for medical expenses or childcare costs. The money comes out of your paycheck before taxes are calculated, which lowers your taxable income for the year. You then use the FSA debit card or submit receipts to reimburse yourself for may be able to access expenses.

FSAs come in two types: a medical FSA (sometimes called a healthcare FSA) covers doctor visits, prescriptions, dental work, and other medical costs; a dependent care FSA covers childcare, preschool, or adult day care for a dependent you claim on your taxes. Most employers offer one or both, but you cannot use the same FSA account for both types of expenses.

The main trade-off is the "use-it-or-lose-it" rule. Money you do not spend by the end of the plan year (usually December 31) goes back to your employer — you cannot roll it over to the next year. Some employers offer a grace period of up to 2.5 months into the new year, or let you carry over up to $610 (the 2024 limit), but most do not. This means you need to estimate carefully how much you will actually spend.

Key Takeaways

  • FSA money comes from your paycheck before taxes, which reduces what you owe in federal income tax and Social Security tax.
  • You can use an FSA for medical expenses (medical FSA) or childcare costs (dependent care FSA), but not both in the same account.
  • Money left unspent at the end of the plan year is forfeited unless your employer offers a grace period or carryover option.
  • You contribute a fixed amount each year during your employer's open enrollment period, and you cannot change that amount mid-year unless you have a may have access to life event.

How much you can contribute and who can use an FSA

For 2024, the maximum contribution to a medical FSA is $3,200 per year. For a dependent care FSA, the limit is $5,000 per year for a single filer or married couple filing jointly, or $2,500 if you are married filing separately. These limits change each year, and your employer may set a lower limit than the federal maximum.

You can only open an FSA through your employer — you cannot set one up on your own. If you are self-employed or your employer does not offer an FSA, you are not able to use one. You must also be enrolled in your employer's health plan to open a medical FSA, though some employers allow medical FSA enrollment without health plan enrollment (this is rare).

You choose your contribution amount during your employer's open enrollment period, which is usually once a year in the fall or winter. Once you lock in your amount, you cannot change it unless you have a may have access to life event — marriage, divorce, birth of a child, loss of other health coverage, or a significant change in childcare costs. Simply changing your mind is not enough to adjust your contribution mid-year.

What expenses you can pay for with an FSA

A medical FSA covers a wide range of healthcare costs: doctor visit copays, prescription medications, dental work, vision care, hearing aids, and medical equipment like crutches or blood glucose monitors. It also covers some over-the-counter items, but only if you have a prescription from your doctor — over-the-counter pain relievers, allergy medicine, or cold medicine do not count unless prescribed.

A dependent care FSA pays for childcare while you work: daycare centers, in-home nannies, preschool, and after-school programs all may have access to. It also covers adult day care for an elderly parent or other dependent you claim on your taxes. It does not cover overnight camps, tuition for school, or babysitting for social events.

The IRS publishes a detailed list of may be able to access expenses, and the rules are strict. If you are unsure whether an expense qualifies, ask your FSA administrator before you spend the money — if you submit a receipt for something that does not may have access to, you will have to pay it back out of pocket and may owe taxes on the reimbursement.

How to use your FSA and get reimbursed

Most FSAs issue a debit card that you can swipe at the pharmacy, doctor's office, or daycare center. The card is linked to your FSA account, and the charge comes directly from your balance. Some FSAs require you to submit receipts after you pay out of pocket, then the administrator reimburses you by check or direct deposit.

If you use the debit card, keep your receipts anyway. Your FSA administrator may ask you to prove that a charge was for an may be able to access expense, especially for large purchases or items that could be personal care products rather than medical supplies. If you cannot provide a receipt, the administrator may deny the reimbursement and you will have to repay the money.

If you submit receipts for reimbursement, the process usually takes one to two weeks. You will need the original receipt showing what you bought, the date, and the amount. Some administrators accept photos of receipts submitted through a mobile app; others require paper copies mailed in. Check your plan documents or call your FSA administrator to find out what method they use.

The tax savings and the trade-offs

The main benefit of an FSA is the tax savings. If you contribute $2,500 to a medical FSA and you are in the 22% federal tax bracket, you save about $550 in federal taxes alone. You also save 7.65% in Social Security and Medicare taxes (though only up to the Social Security wage base). For a dependent care FSA, the savings work the same way, though some people may also be able to claim a dependent care tax credit on their return — you cannot use both the FSA and the credit for the same expenses.

The downside is the use-it-or-lose-it rule. If you contribute $2,500 and only spend $1,800, you lose the $700. This makes FSAs risky if your medical expenses are unpredictable or if you are not sure how much childcare you will need. Some people deliberately contribute a lower amount to play it safe, which means they miss out on tax savings.

Another limitation is that you cannot access your FSA money if you leave your job. When you quit or are laid off, your FSA account closes and any unspent balance is forfeited. You may be able to continue your FSA under COBRA (Consolidated Omnibus Budget Reconciliation Act), but you have to pay the full premium yourself, which defeats much of the tax advantage.

FSA vs. HSA: which is right for you

An HSA (Health Savings Account) is similar to an FSA but works differently. An HSA is portable — you own it and can take it with you if you change jobs. Money rolls over year to year, so there is no use-it-or-lose-it rule. You can also invest HSA funds and use them for retirement, similar to a 401(k).

The catch is that you can only open an HSA if you are enrolled in a high-deductible health plan (HDHP), which has a higher deductible than a standard health plan. You also cannot have an HSA and a medical FSA at the same time — you have to choose one or the other. If your employer offers both, you need to decide which fits your situation better.

If you have predictable medical expenses and want to save money on taxes this year, an FSA makes sense. If your expenses are unpredictable or you want to build long-term savings, an HSA is usually the better choice. If your employer offers both, compare the deductible on the HDHP to your expected medical costs, and think about whether you can afford to set aside HSA money without touching it.

What happens to your FSA when you leave your job

When you leave your job, your FSA account closes immediately. Any unspent balance is forfeited — you cannot take it with you or roll it into another account. This is one of the biggest drawbacks of an FSA compared to an HSA.

You may have the option to continue your FSA under COBRA, which lets you keep the same plan for up to 18 months. However, you have to pay the full premium yourself (your employer no longer subsidizes it), plus a 2% administrative fee. For most people, this is expensive enough that it is not worth doing.

If you are planning to leave your job, try to spend down your FSA balance before your last day. Use the grace period if your employer offers one, or plan medical or dental work before you go. If you have money left over, it is gone — there is no way to recover it.

Frequently Asked Questions

Can I use my FSA for my spouse or children?

A medical FSA covers only you and your dependents you claim on your tax return. A dependent care FSA covers childcare for a dependent you claim, or adult day care for an elderly parent. You cannot use your FSA to pay for your spouse's medical expenses unless they are also your dependent, which is rare.

What happens if I submit a receipt for an ineligible expense?

Your FSA administrator will deny the reimbursement request. You will have to pay for the expense out of pocket. If the administrator already reimbursed you, you will have to repay the money. In some cases, you may also owe taxes on the reimbursement if it was for a non-may be able to access item.

Can I change my FSA contribution amount during the year?

No, unless you have a may have access to life event such as marriage, divorce, birth of a child, or a significant change in childcare costs. Simply wanting to contribute more or less is not enough. You can only change your contribution during open enrollment, which is usually once a year.

Do I lose my FSA if I take unpaid leave or go on disability?

It depends on your employer's plan. Some employers let you keep your FSA during unpaid leave or disability; others close it. Check your plan documents or ask your HR department. If your FSA closes, any unspent balance is forfeited.

Can I use my FSA to pay for gym memberships or wellness programs?

No, gym memberships and general wellness programs do not may have access to. However, if your doctor prescribes a specific program (such as cardiac rehabilitation or a weight-loss program for a medical condition), it may may have access to. Ask your FSA administrator before you enroll.