A healthcare FSA lets you set aside pre-tax money from your paycheck to pay for medical expenses your insurance doesn't cover

A healthcare Flexible Spending Account (FSA) is an employer-sponsored plan that lets you contribute money before taxes are taken out of your paycheck. You then use that money to pay for medical, dental, and vision expenses that your health insurance plan doesn't cover or covers only partially. The main advantage is that you avoid paying federal income tax, Social Security tax, and Medicare tax on the money you contribute — which typically saves you 20 to 40 percent on those expenses, depending on your tax bracket.

Your employer sets up the FSA through a third-party administrator who manages the account. You decide how much to contribute each year during your employer's open enrollment period, usually in the fall. That amount is divided evenly across your paychecks for the year. When you have a medical expense, you submit a claim with a receipt, and the administrator reimburses you from your FSA balance.

Key Takeaways

  • Money in an FSA is deducted from your paycheck before taxes, which reduces your taxable income and saves you money on federal, Social Security, and Medicare taxes.
  • You can use FSA funds for copays, deductibles, prescription medications, dental work, vision care, and other medical expenses not fully covered by insurance.
  • You must decide how much to contribute during your employer's open enrollment period, and that amount is locked in for the entire year.
  • FSAs have a "use-it-or-lose-it" rule: money you don't spend by the end of the plan year is forfeited, though many employers offer a grace period or carryover of up to $610.
  • You can only open or change an FSA during open enrollment or if you have a may have access to life event like a change in health insurance or birth of a child.

What expenses you can pay for with an FSA

The IRS maintains a list of may have access to medical expenses that FSA funds can cover. These include copays and coinsurance for doctor visits, deductibles, prescription medications, insulin, and medical equipment like crutches or blood pressure monitors. Dental work including cleanings, fillings, and orthodontia qualifies. Vision expenses like eye exams, glasses, and contact lenses also count.

Some expenses that people assume are covered actually are not. Over-the-counter medications like cold medicine or pain relievers require a prescription to be FSA-may be able to access, though insulin is an exception and does not need a prescription. Cosmetic procedures, gym memberships, and general wellness products like vitamins are not covered. If you are unsure whether a specific expense qualifies, your FSA administrator can tell you before you spend the money.

How much you can contribute and when

The IRS sets an annual contribution limit that changes each year. For 2024, the limit is $3,200 per person. Your employer may set a lower limit, but cannot allow you to contribute more than the IRS maximum. You decide your contribution amount during open enrollment, which is typically in October or November for a plan year that starts January 1.

Once you choose an amount, you cannot change it during the year unless you have a may have access to life event. These include losing or gaining health insurance coverage, getting married or divorced, having a child, or a significant change in your spouse's employment or benefits. You have 30 to 60 days after the event to request a change, depending on your employer's rules. If you do not have a may have access to event, you are locked into your contribution for the full year.

The use-it-or-lose-it rule and carryover options

FSAs operate under a "use-it-or-lose-it" rule: any money you do not spend by the end of the plan year is forfeited and goes back to your employer. This is the biggest drawback of an FSA and requires careful planning. If you contribute $2,500 but only spend $1,800, you lose the remaining $700.

Many employers offer ways to soften this rule. Some allow a grace period of up to 2.5 months into the next year to spend remaining funds — so you might have until March 31 to use money from the previous year's FSA. Others allow you to carry over up to $610 of unused funds into the next year. A few employers offer both. Check your plan documents or ask your benefits administrator which option your employer uses, because this significantly affects how much you should contribute.

How to submit claims and get reimbursed

When you have a medical expense, you need to submit a claim to your FSA administrator. Most administrators now offer online portals or mobile apps where you can upload a photo of your receipt. Some still accept paper claims by mail. You will need to provide the date of service, the provider's name, the amount paid, and proof that the expense is FSA-may be able to access.

Reimbursement typically takes one to two weeks after you submit a complete claim. Some FSA administrators issue a debit card that you can use directly at pharmacies, doctor offices, and other providers, which skips the reimbursement step entirely. If your employer offers an FSA debit card, ask whether it requires you to submit receipts afterward or whether the card is pre-loaded with your contribution amount and simply deducts as you spend.

FSA versus HSA: when each makes sense

If your employer also offers a Health Savings Account (HSA), you may wonder which to choose. An HSA is only available if you are enrolled in a high-deductible health plan, and it has higher contribution limits — $4,150 for individual coverage in 2024. Unlike an FSA, HSA money rolls over year to year and never expires. However, not everyone qualifies for an HSA, and some employers do not offer one.

If you have access to both, the general rule is: contribute to the HSA first if you can afford to, because the money never expires and you can invest it for long-term healthcare costs in retirement. Use an FSA for money you know you will spend on medical expenses within the year. Some employers allow you to have both an FSA and an HSA at the same time, but the rules are strict — you cannot use both to pay for the same expense, and your FSA cannot cover certain items if you have an HSA.

Common mistakes to avoid

The biggest mistake is overestimating how much you will spend and losing money to the use-it-or-lose-it rule. Be conservative: look at your actual medical expenses from the past two years, add a small buffer for unexpected costs, and contribute that amount. If your employer offers a grace period or carryover, you can be slightly more generous.

Another common error is assuming an expense is FSA-may be able to access without checking first. Sunscreen, toothpaste, and many over-the-counter items seem medical but are not covered. Before you buy something expecting to use FSA funds, confirm with your administrator that it qualifies. Finally, do not wait until December to spend down your balance — submit claims as you incur expenses throughout the year so you have time to correct any issues before the deadline.

Frequently Asked Questions

What happens to my FSA money if I leave my job?

You lose access to your FSA balance immediately when you leave your employer. The money does not follow you to a new job. However, you may be able to continue coverage under COBRA for a limited time, which lets you keep using the remaining FSA balance through the end of the plan year. Check with your former employer's benefits administrator about COBRA may be able to access and cost.

Can I use my FSA for my spouse or children?

Yes. FSA funds can pay for medical expenses of you, your spouse, and any dependents you claim on your tax return. You do not need to be the person receiving the care — you just need to be the account holder and the expense must be for a may have access to dependent.

Do I need receipts to get reimbursed?

Yes. Your FSA administrator requires proof of the expense and proof that it is FSA-may be able to access. This usually means a receipt showing the date, provider name, and amount. Some administrators may ask follow-up questions about what the expense was for, especially for items that could be personal or medical.

Can I change my FSA contribution mid-year?

Only if you have a may have access to life event such as a change in health insurance, marriage, divorce, birth of a child, or significant change in your spouse's job or benefits. You cannot change your contribution just because you want to contribute more or less. If you have no may have access to event, your contribution is locked in for the full year.

What is the difference between an FSA and a dependent care FSA?

A healthcare FSA pays for medical expenses. A dependent care FSA (also called a dependent care account) pays for childcare or adult dependent care expenses while you work. They are separate accounts with separate contribution limits and separate use-it-or-lose-it rules. Some employers offer both, and you can contribute to each one.