A Healthcare FSA lets you set aside pretax money from your paycheck to pay for medical costs your insurance doesn't cover

A Healthcare Flexible Spending Account (FSA) is an employer-sponsored account where you contribute money before taxes are taken out. You then use that money to pay for medical, dental, and vision costs that your health insurance plan doesn't pay for — like copays, deductibles, prescription costs, and certain over-the-counter items. The main benefit is that you avoid paying income tax and payroll tax on the money you set aside, which means you keep more of what you earn.

Healthcare FSAs are offered through your employer's benefits plan, not through a government program. You choose how much to contribute each year during your employer's open enrollment period, and that money is deducted from your paychecks throughout the year. You then submit receipts or use a debit card linked to the account to pay for covered expenses.

Key Takeaways

  • You contribute pretax money to a Healthcare FSA through payroll deduction, which reduces the income and payroll taxes you owe.
  • You can use FSA funds to pay for copays, deductibles, prescription medications, dental work, vision care, and certain over-the-counter medical items.
  • Most Healthcare FSAs have a "use-it-or-lose-it" rule: money you don't spend by the end of the plan year does not roll over to the next year.
  • You must be enrolled in your employer's health plan and have an FSA option available to open an account; you cannot open one on your own.
  • FSA funds are held in an account managed by your employer or a third-party administrator, and you access them by submitting receipts or using a debit card.

What expenses you can and cannot pay for with an FSA

The IRS maintains a list of may have access to medical expenses that you can pay for with FSA funds. These include copays and coinsurance for doctor visits, prescription medications, insulin, medical equipment like crutches or wheelchairs, dental procedures, eyeglasses and contact lenses, hearing aids, and certain over-the-counter items like pain relievers and allergy medications (though over-the-counter drugs now require a prescription or doctor's note).

You cannot use FSA funds for expenses that are purely cosmetic, such as teeth whitening or elective plastic surgery. You also cannot use the money for health insurance premiums, gym memberships, vitamins that are not prescribed by a doctor, or services like massage therapy unless they are prescribed as medical treatment. Expenses for your spouse or dependents can be covered if they are on your tax return, but the rules are strict about what counts as a dependent.

The easiest way to know whether an expense qualifies is to check the IRS Publication 502 list or ask your FSA plan administrator before you spend the money. Many FSA debit cards will reject a purchase if it is not on the approved list, which prevents you from accidentally using funds on ineligible items.

How the use-it-or-lose-it rule works

Most Healthcare FSAs operate under a use-it-or-lose-it rule, which means that any money you do not spend by the end of the plan year (usually December 31) is forfeited and goes back to your employer. This is different from a Health Savings Account (HSA), where unused money rolls over indefinitely. Because of this rule, you need to estimate carefully how much medical spending you expect in the coming year.

Some employers offer a grace period of up to two and a half months into the next year to spend down your remaining balance, or they may allow a small carryover amount (usually $610 or less, though this limit changes annually). Check your plan documents or ask your benefits administrator whether your employer offers either of these options, because they can reduce the risk of losing money.

If you know you will not use all your FSA funds by year-end, you can submit claims for expenses you have already incurred but not yet reimbursed. Many people use this strategy to claim dental work or vision expenses they paid for in November or December.

How to access and use your FSA funds

Once your FSA is open, you can access the money in two main ways. The first is to use a debit card issued by your FSA plan administrator. You swipe it at the pharmacy, doctor's office, or medical supply store just like a regular debit card, and the cost is deducted from your FSA balance. The second is to pay out of pocket and then submit a claim for reimbursement by sending in receipts and a claim form to your plan administrator.

If you use the debit card, the administrator may ask you to submit a receipt afterward to verify that the purchase was for a covered expense. This is called substantiation, and it protects both you and the plan from fraud. Keep all receipts for at least three to five years in case you are asked to prove that an expense was legitimate.

You can check your FSA balance online through your plan administrator's website or app, and you can usually submit claims electronically as well. The time it takes to receive reimbursement varies by administrator but is typically five to ten business days after your claim is received and approved.

How much you can contribute and when you can change it

The IRS sets an annual limit on how much you can contribute to a Healthcare FSA. For 2024, the limit is $3,200, though this amount changes each year. Your employer may set a lower limit, so check your plan documents to see what your specific employer allows.

You can only change your FSA contribution during your employer's open enrollment period, which is usually once a year in the fall. However, you can make changes outside of open enrollment if you experience a may have access to life event, such as a change in your health coverage, birth or adoption of a child, marriage or divorce, or a significant change in your medical expenses. You must request the change within 30 to 60 days of the event, depending on your employer's rules.

If you leave your job, your FSA coverage typically ends on your last day of employment. You may be able to continue using your FSA through COBRA (Consolidated Omnibus Budget Reconciliation Act) if your employer offers it, but you will have to pay the full premium yourself, including the employer's share.

Healthcare FSA versus Health Savings Account (HSA)

A Healthcare FSA and a Health Savings Account are both tax-advantaged accounts for medical expenses, but they work differently. An FSA is tied to your employer and has a use-it-or-lose-it rule, while an HSA is portable (you keep it even if you change jobs) and unused money rolls over year to year. An HSA also requires you to be enrolled in a high-deductible health plan, whereas an FSA can be paired with any health insurance plan your employer offers.

If your employer offers both an FSA and an HSA, you generally cannot contribute to both in the same year — the IRS prohibits this. However, if you have an HSA through your spouse's employer, you may be able to contribute to an FSA through your own employer under certain circumstances. Ask your benefits administrator about the rules that apply to your situation.

An HSA is often better if you expect to have ongoing medical expenses and want to save money long-term, because the balance grows and never expires. An FSA is better if you have predictable annual medical costs and want to maximize your tax savings in a single year.

What happens if you submit an ineligible expense claim

If you submit a claim for an expense that does not may have access to under IRS rules, your plan administrator will deny the claim and the money will not be reimbursed. You will have to pay for that expense out of pocket. If you use your FSA debit card for an ineligible purchase and the transaction goes through, the administrator may ask you to repay the FSA from your personal funds.

In rare cases, if there is a pattern of ineligible claims, your employer or plan administrator may investigate or suspend your account. This is why it is important to understand what qualifies before you spend or claim money. When in doubt, ask your plan administrator or check IRS Publication 502 before you submit a claim.

Frequently Asked Questions

Can I use my Healthcare FSA to pay for my spouse's or children's medical expenses?

Yes, if your spouse and children are claimed as dependents on your tax return. You can use your FSA to pay for their copays, prescriptions, dental work, and other covered medical expenses. However, you cannot use FSA funds to pay for a dependent's health insurance premiums.

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

Under the use-it-or-lose-it rule, unused money is forfeited and returned to your employer. Some employers offer a grace period of up to two and a half months into the next year to spend remaining funds, or they may allow a small carryover. Check your plan documents to see if your employer offers either option.

Can I open a Healthcare FSA on my own, or does it have to be through my employer?

You can only open a Healthcare FSA through your employer's benefits plan. These accounts are employer-sponsored and cannot be opened independently. If your employer does not offer an FSA, you cannot set one up on your own.

Can I use my FSA to pay for over-the-counter medications?

Some over-the-counter medications may have access to, such as pain relievers and allergy medications, but as of 2020 they require a prescription or a doctor's note. Vitamins and supplements generally do not may have access to unless they are prescribed by a doctor for a specific medical condition.

What should I do if my FSA debit card is declined at checkout?

A declined transaction usually means the item is not on the IRS list of covered expenses. Pay out of pocket and contact your plan administrator to confirm whether the expense qualifies. If it does, you can submit a claim for reimbursement with your receipt.