FSA money is pretax dollars your employer sets aside in an account for you to pay medical expenses

A Flexible Spending Account (FSA) holds money deducted from your paycheck before taxes are taken out. Your employer doesn't contribute to it — you do, through payroll deductions you choose at enrollment. The account exists solely to pay for medical, dental, vision, and dependent care costs that your health insurance doesn't cover or covers only partially.

The money is yours to spend on may have access to expenses throughout the year, but there's a catch: anything you don't use by the end of the plan year is forfeited. You cannot carry it forward, and you cannot get it back as a refund. This is called the "use-it-or-lose-it" rule, and it's the single most important thing to understand about FSA money.

Because the money comes out before taxes, you save on federal income tax, Social Security tax, and Medicare tax on whatever amount you contribute. If you're in the 22% federal tax bracket and contribute $2,500 to an FSA, you save roughly $550 in taxes that year — but only if you actually spend the money on may have access to expenses.

Key Takeaways

  • FSA money is your own pretax paycheck dollars set aside in an account, not assistance programs from your employer.
  • You must spend FSA money on may have access to medical, dental, vision, or dependent care expenses, or you lose whatever remains at year-end.
  • The tax savings come from paying for expenses with pretax dollars, which reduces your taxable income.
  • You decide how much to contribute each year during open enrollment, and that amount is locked in unless you have a may have access to life change.
  • FSA money is separate from your health insurance deductible and copays — it covers different costs or fills gaps your plan doesn't cover.

How FSA money differs from a health savings account

An HSA (Health Savings Account) and an FSA both use pretax dollars, but they work very differently. An HSA lets you roll unused money forward year to year and even invest it — you keep whatever you don't spend. An FSA forces you to use it or lose it annually, with no carryover.

HSAs are only available if you're enrolled in a high-deductible health plan (HDHP). FSAs work with any health plan your employer offers. If your employer offers both, you must choose one or the other — you cannot have both in the same year.

For most people, an HSA is the better long-term choice because you build savings. But if your employer doesn't offer an HDHP, or if you know you'll spend money on medical expenses this year anyway, an FSA lets you save on taxes immediately.

What counts as a may have access to FSA expense

may have access to expenses are specific and narrow. They include copays, coinsurance, deductibles, and prescription medications. They also cover dental work (cleanings, fillings, root canals, orthodontia), vision care (eye exams, glasses, contacts, contact solution), and hearing aids.

Over-the-counter medications like ibuprofen, allergy medicine, and cold medicine now count as may have access to expenses — this changed in 2020. However, over-the-counter items like sunscreen, toothpaste, shampoo, and vitamins do not count unless prescribed by a doctor.

Dependent care expenses — daycare, preschool, after-school programs, and summer camps for children under 13 — are also may have access to, up to a limit. Mental health counseling, physical therapy, chiropractic care, and acupuncture count if your plan covers them. Fertility treatments, including IVF, are may have access to expenses.

Expenses that do not count include gym memberships, cosmetic procedures, general wellness products, and most over-the-counter items without a prescription. If you're unsure whether something qualifies, your FSA plan administrator can tell you before you spend the money.

How much you can contribute and when you lose access

The IRS sets an annual limit on FSA contributions. For 2024, the limit is $3,300 per person per year. Your employer may set a lower limit, but cannot exceed the IRS cap. You choose your contribution amount during open enrollment, usually in the fall, and that amount is locked in for the entire plan year.

You can change your contribution only if 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 your dependent care costs. A job change or salary increase alone does not may have access to.

When you leave your job, your FSA access ends immediately. You have a short window (usually 60 to 90 days) to spend any remaining balance or submit claims for expenses you already incurred. After that, any unused money is forfeited to your employer. This is why it's critical to track what you've spent and what remains in your account as the year winds down.

The tax savings explained

The money you contribute to an FSA never appears on your W-2 as taxable income. If you contribute $2,000 and earn $50,000, you're only taxed on $48,000. This reduces your federal income tax, and it also reduces the income subject to Social Security and Medicare taxes.

The actual tax savings depends on your tax bracket. Someone in the 12% federal bracket saves roughly $240 on a $2,000 contribution. Someone in the 24% bracket saves roughly $480 on the same amount. Add state and local taxes, and the total savings can be 30% to 40% of what you contribute.

But this only works if you spend the money. If you contribute $2,000 and only spend $1,200, you've lost the tax benefit on the $800 you didn't use — and you lose that $800 entirely.

Common mistakes that cost you money

The biggest mistake is overestimating how much you'll spend and losing money at year-end. Many people contribute the maximum, assume they'll use it all, and then forfeit hundreds of dollars. Start by tracking your actual medical and dependent care spending from the past year, then contribute slightly less than that amount.

Another mistake is not submitting claims promptly. FSA plans have claim deadlines — usually 60 to 90 days after the end of the plan year. If you don't submit a receipt or claim form by that date, the expense doesn't count and you lose the money.

A third mistake is buying things that seem medical but aren't may have access to. Vitamins, supplements, and most over-the-counter items without a prescription won't be reimbursed. Always check with your plan administrator before spending FSA money on something you're unsure about.

Finally, some people don't realize they can use FSA money for dependent care. If you pay for daycare or after-school programs, that's a may have access to expense up to $5,000 per year (or $2,500 if married and filing separately). Many people miss this and leave money on the table.

How to access and spend your FSA money

Most FSA plans issue a debit card that you can use at pharmacies, doctor's offices, and vision centers. Some plans require you to pay out of pocket and then submit a claim for reimbursement. A few plans use both methods.

When you use the FSA debit card, the transaction is usually approved instantly if the merchant is recognized as a medical provider. If the merchant isn't recognized, the transaction may be declined, and you'll have to pay out of pocket and submit a claim later.

For reimbursement claims, you'll need to submit a receipt or explanation of benefits (EOB) from your provider. Your plan administrator will review it and send you a check or direct deposit within a few weeks. Keep all receipts and documentation — the IRS allows audits of FSA spending, and you need proof that expenses were may have access to.

Frequently Asked Questions

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

Yes, if your spouse is covered under your health plan or if you're filing taxes jointly. However, you cannot use FSA money for a spouse's dependent care expenses unless they are also your dependent. Check your plan documents or ask your administrator for specifics.

What happens to my FSA money if I don't use it by the end of the year?

It is forfeited. You lose it entirely. Some employers offer a "grace period" of up to 2.5 months into the next year to spend remaining funds, but this is optional and not all plans include it. Check your plan documents to see if yours does.

Can I withdraw FSA money for non-medical expenses?

No. If you withdraw money for a non-may have access to expense, you'll owe income tax on that amount plus a 20% penalty. The only exception is if you have a may have access to life event that ends your FSA coverage — then you can withdraw unused funds without penalty, but you still owe income tax on them.

Do I have to submit receipts every time I use my FSA debit card?

Not always. If the merchant is recognized as a medical provider, the transaction is approved without a receipt. If the merchant isn't recognized, you may be asked to submit a receipt after the fact. Keep all receipts for at least three years in case of an audit.

Can I use FSA money for dental work or glasses?

Yes. Dental work (cleanings, fillings, root canals, braces) and vision care (eye exams, glasses, contacts, contact solution) are both may have access to FSA expenses. You can use FSA money at any dentist or optometrist, not just in-network providers.