An FSA is a tax-advantaged savings account you fund through payroll deductions to pay for medical and dependent care costs

A Flexible Spending Account (FSA) is an account your employer offers that lets you set aside pre-tax money to pay for certain healthcare and dependent care expenses. You decide how much to contribute each year, the money comes out of your paycheck before taxes are calculated, and you use a debit card or submit receipts to reimburse yourself for covered costs. The tax savings come from not paying federal income tax, Social Security tax, or Medicare tax on the money you put in.

FSAs are separate from health insurance. You can have an FSA whether you have employer coverage, buy your own plan, or have no insurance at all. The account is tied to your job, though — if you leave your employer, you lose the account and any unused money in it (with limited exceptions for certain life events).

There are two types of FSAs: a healthcare FSA (sometimes called a medical FSA) for medical, dental, and vision costs, and a dependent care FSA for childcare or adult dependent care expenses. Some employers offer both; some offer only one.

Key Takeaways

  • You contribute pre-tax dollars through payroll deduction, which reduces your taxable income and the taxes you owe that year.
  • Healthcare FSAs cover copays, deductibles, prescriptions, dental work, glasses, and other medical expenses; dependent care FSAs cover daycare, after-school programs, and adult care.
  • You must spend the money within the plan year or lose it — there is no rollover to the next year (with rare exceptions your employer may offer).
  • You can only open or change your FSA contribution during your employer's open enrollment period, or if you have a may have access to life event like a birth, marriage, or job loss.

How much you can contribute and when

The IRS sets a maximum contribution limit each year. For 2024, the healthcare FSA limit is $3,200 and the dependent care FSA limit is $5,000 (or $2,500 if you are married and file taxes separately). These limits change annually, and your employer will tell you the new limit during open enrollment.

You choose your contribution amount once a year during your employer's open enrollment period, usually in the fall for coverage starting January 1. The money is deducted from each paycheck in equal amounts throughout the year. If you have a may have access to life event — birth of a child, marriage, divorce, loss of other coverage, or significant change in childcare costs — you can change your contribution outside of open enrollment, but you must request the change within 30 to 60 days of the event (rules vary by employer).

Once you choose an amount, you are locked in for the full plan year. You cannot lower your contribution unless you have a may have access to event, even if your circumstances change.

What you can pay for with a healthcare FSA

A healthcare FSA covers most medical, dental, and vision costs that are not fully covered by insurance. This includes copays and coinsurance (your share of the cost after insurance pays), deductibles, prescription medications, dental work like fillings and cleanings, eyeglasses and contact lenses, hearing aids, and certain medical equipment like crutches or blood glucose monitors.

It does not cover health insurance premiums, over-the-counter medications (unless you have a prescription), cosmetic procedures, or gym memberships. The IRS publishes a detailed list of what counts; your employer's plan documents will also specify what is and is not covered.

You do not need to submit receipts to your employer upfront. You can pay out of pocket and then submit the receipt to your FSA administrator (the company that manages the account) to get reimbursed. Or, if your FSA comes with a debit card, you can swipe it at the pharmacy or doctor's office and the payment comes straight from the account.

What you can pay for with a dependent care FSA

A dependent care FSA covers the cost of childcare or adult dependent care that allows you to work. This includes daycare centers, in-home childcare providers, after-school programs, summer camps, and care for an elderly parent or disabled spouse. The care must be for someone you claim as a dependent on your taxes, and it must be so you can work (or, if you are married, so both spouses can work).

It does not cover overnight camps, tuition for school or college, or care provided by a spouse or child under age 19. The provider must give you their tax ID number, which you report to the IRS when you file your taxes.

The use-it-or-lose-it rule and what happens to unused money

Money left in your FSA at the end of the plan year does not roll over to the next year — you lose it. This is called the use-it-or-lose-it rule. It is one of the biggest drawbacks of an FSA: if you contribute $2,000 and only spend $1,500, the remaining $500 is forfeited.

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 from the previous year. A few employers also offer a carryover option that lets you roll up to $640 (in 2024) into the next year, but this is optional and not all employers provide it. Check your employer's plan documents to see if either option is available.

Because of this rule, most people contribute a conservative amount — enough to cover expenses they are certain they will have, like regular prescriptions or known childcare costs, but not so much that they risk losing money.

How to submit claims and get reimbursed

If your FSA comes with a debit card, you can use it at pharmacies, doctor's offices, and other providers that accept it. The payment comes directly from your account, and you do not need to submit anything.

If you pay out of pocket, you submit a claim to your FSA administrator. This usually means uploading a receipt through an online portal, mailing a paper form with the receipt attached, or using a mobile app. The administrator reviews the claim to make sure the expense is covered, and if it is approved, they reimburse you by check, direct deposit, or account credit within a few business days.

Keep all receipts and documentation for at least three years in case the IRS or your employer asks to verify your claims. Some administrators also ask for a doctor's note or letter stating that an expense is medically necessary.

FSA vs. other ways to save on healthcare costs

An FSA is different from a Health Savings Account (HSA), which is only available if you have a high-deductible health plan. An HSA lets you save money that rolls over year to year, and you can invest it. An FSA has a lower contribution limit, the money does not roll over, and you cannot invest it — but you do not need a specific type of health plan to have one.

A Health Reimbursement Arrangement (HRA) is another employer-sponsored account, but the employer owns it and controls how much you can contribute and what you can spend it on. An FSA is employee-directed: you decide how much to contribute (within the IRS limit) and what to spend it on (within the covered categories).

If your employer offers an FSA and you have predictable medical or childcare expenses, it usually saves you money because you avoid taxes on that portion of your income. The trade-off is the use-it-or-lose-it rule and the fact that you cannot access the money if you leave your job.

Frequently Asked Questions

What happens to my FSA if I quit my job or get laid off?

You lose access to the account immediately. Any unused money is forfeited. However, you may be able to continue coverage under COBRA (a federal law that lets you keep employer health benefits for a limited time), and some employers allow you to submit claims for expenses you incurred before you left. Check with your employer's benefits department about your options.

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

Yes, as long as your spouse is a tax dependent. You can also use it for your children and any other dependents you claim on your tax return. The person receiving the care does not have to be on your health insurance plan.

Do I have to have health insurance to open an FSA?

No. You can have a healthcare FSA whether you have employer coverage, buy your own plan, or have no insurance. The FSA is separate from insurance and covers out-of-pocket costs you pay yourself.

Can I change my FSA contribution mid-year?

Only if you have a may have access to life event, such as a birth, marriage, divorce, significant change in childcare costs, or loss of other coverage. You must request the change within 30 to 60 days of the event. Outside of these circumstances, you are locked into your contribution for the full plan year.

What if I do not spend all my FSA money by the end of the year?

You lose it, unless your employer offers a grace period (usually 2.5 months to submit claims for prior-year expenses) or a carryover option (up to $640 in 2024). Check your plan documents or ask your benefits department what your employer offers.