An FSA is a tax-advantaged savings account your employer offers to set aside money for medical expenses

A Flexible Spending Account (FSA) is an account where you put pre-tax money from your paycheck to pay for medical costs that your health insurance doesn't cover or covers only partially. Your employer sets up the account through a plan administrator, and you decide how much to contribute each year during open enrollment. The money comes out of your paycheck before taxes are calculated, which lowers your taxable income for the year.

FSAs are not the same as health insurance. They work alongside your insurance plan to help cover out-of-pocket costs like copays, deductibles, prescription medications, dental work, vision care, and certain medical equipment. You control the account and decide when to spend the money on covered expenses.

The main trade-off is the "use-it-or-lose-it" rule: money you don't spend by the end of the plan year (usually December 31) goes back to your employer. Some plans allow a small carryover or a grace period, but most do not. This means you need to estimate your medical spending accurately before you commit to a contribution amount.

Key Takeaways

  • FSA money comes from your paycheck before taxes, which reduces the amount of income tax you owe that year.
  • You can use FSA funds to pay for copays, deductibles, prescription drugs, dental care, vision care, and certain medical supplies and equipment.
  • You choose your contribution amount once per year during open enrollment, and the money is divided across your paychecks.
  • Unspent FSA money at the end of the year is forfeited; you cannot roll it over to the next year in most plans.
  • FSAs are offered by employers as part of their benefits package; you cannot open one on your own.

How much you can contribute and who can have an FSA

Your employer decides whether to offer an FSA and sets the rules within federal limits. For 2024, the maximum contribution is $3,200 per year, though your employer may set a lower limit. You contribute by choosing a dollar amount during open enrollment, usually in November or December for the following calendar year. The amount is divided evenly across your paychecks for the year.

To have an FSA, you must be employed by a company that offers one. Self-employed people and those who work for very small employers (typically under 50 employees) usually cannot access an FSA through their job. If you have an FSA through one employer, you cannot have a second FSA at another job in the same year. If you lose your job or change employers, your FSA coverage typically ends, though you may have a limited time to spend remaining funds.

You cannot have an FSA and a Health Savings Account (HSA) in the same year, because HSAs have different rules about what counts as a covered expense. If you switch from an FSA to an HSA, you must wait until the next plan year to make the change.

What expenses the FSA covers

FSA funds can pay for a wide range of medical, dental, and vision expenses that are not fully covered by insurance or that you pay out of pocket. Common covered expenses include health insurance copays and deductibles, prescription medications, over-the-counter pain relievers and cold medicines (with a prescription from your doctor), dental cleanings and fillings, eyeglasses and contact lenses, and hearing aids.

The account can also cover certain medical equipment and supplies: blood glucose monitors, crutches, bandages, heating pads, and pregnancy tests. Mental health counseling and therapy sessions are covered if they are provided by a licensed professional. Gym memberships and general wellness programs are not covered, but specific medical treatments prescribed by a doctor are.

Expenses that are not covered include cosmetic procedures (like teeth whitening for appearance only), over-the-counter medications without a prescription, and health insurance premiums themselves. Your plan documents will list the full set of covered and excluded expenses; if you are unsure whether something qualifies, ask your plan administrator before you spend the money.

How to use FSA money when you need it

When you have a medical expense, you pay for it out of pocket at the time of service, just as you would without an FSA. You then submit a claim to your plan administrator with a receipt or explanation of benefits from your provider. The administrator reviews the claim, confirms it is for a covered expense, and reimburses you from your FSA account.

Many employers issue an FSA debit card that you can use at pharmacies, doctors' offices, and other providers that accept it. The card draws directly from your FSA balance without requiring a separate claim. However, not all providers accept FSA cards, and some require a claim form instead. Check with your plan administrator about which payment method works for your situation.

You can submit claims throughout the year as expenses occur. Keep all receipts and documentation in case your plan administrator asks for proof that an expense was covered. Claims are usually processed within one to two weeks. If you leave your job before the end of the plan year, you typically have a short window (often 60 to 90 days) to submit claims for expenses you incurred while enrolled.

The tax savings and the use-it-or-lose-it rule

The main financial benefit of an FSA is the tax savings. Because FSA contributions come from your paycheck before taxes, you pay no federal income tax, Social Security tax, or Medicare tax on that money. If you contribute $2,000 to an FSA and you are in the 22% federal tax bracket, you save roughly $440 in taxes that year. The savings are real, but they only apply to money you actually spend on covered expenses.

The downside is the use-it-or-lose-it rule. Any money left in your FSA at the end of the plan year is forfeited and returned to your employer. You do not get a refund, and you cannot carry the balance forward. This creates a planning challenge: if you overestimate your medical spending, you lose money; if you underestimate, you miss out on tax savings.

Some employers offer a grace period of up to two and a half months into the next year to spend the previous year's FSA funds, or a carryover of up to $640 (for 2024). Ask your plan administrator whether your plan includes either option. If it does not, be conservative with your contribution amount and base it on your actual medical spending from the past few years.

FSA versus HSA and other savings accounts

An HSA (Health Savings Account) is similar to an FSA but works differently. HSAs are available only if you have a high-deductible health insurance plan, and you can open one on your own or through your employer. HSA money rolls over from year to year and never expires, which makes it more flexible than an FSA. However, HSAs have lower annual contribution limits ($4,150 for individual coverage in 2024) and stricter rules about which expenses are covered.

A Dependent Care FSA is a separate account some employers offer for childcare and adult dependent care expenses. It has its own contribution limit (currently $5,000 per year) and its own use-it-or-lose-it rule. You cannot use Dependent Care FSA money for medical expenses, and you cannot use a regular FSA for childcare.

If your employer offers both an FSA and an HSA, you must choose one or the other, not both. If you have an HSA, you can still use it alongside a Dependent Care FSA. The choice depends on your health insurance plan, your expected medical spending, and whether you have dependents who need care.

What happens to your FSA when you change jobs or life circumstances

If you leave your job, your FSA coverage ends on your last day of employment or on the date your employer's plan year ends, whichever comes first. You typically have 60 to 90 days after coverage ends to submit claims for expenses you incurred while enrolled. Any unspent balance is forfeited.

If you move to a new job that offers an FSA, you can enroll in the new employer's plan during that company's open enrollment period or within 30 days of your hire date if you experience a may have access to life event. You cannot transfer money from your old FSA to a new one; each account is separate. You will need to decide on a new contribution amount based on your expected spending at the new job.

Certain life events—marriage, divorce, birth of a child, loss of other health coverage—allow you to change your FSA contribution outside of open enrollment. Contact your plan administrator to learn which events may have access to and what documentation you need to provide. If you become ineligible for an FSA (for example, you become self-employed), you can usually access remaining funds for a limited time before the account closes.

Frequently Asked Questions

Can I use FSA money for my spouse or children?

Yes. FSA funds can pay for covered medical expenses for you, your spouse, and your dependents, including children. You do not need to be the person receiving the care. Submit the claim with documentation showing the expense was for a covered family member.

What if I don't spend all my FSA money by the end of the year?

Unspent money is forfeited and returned to your employer in most plans. Some employers offer a grace period (usually 2.5 months into the next year) or allow a small carryover (up to $640 for 2024). Check your plan documents or ask your employer whether either option applies to you.

Can I change my FSA contribution amount during the year?

No, except if you experience a may have access to life event such as marriage, divorce, birth of a child, or loss of health coverage. Outside of these events and open enrollment, your contribution amount is locked in for the plan year.

Is an FSA the same as a health insurance plan?

No. An FSA is a savings account that works alongside your health insurance to help cover out-of-pocket costs. You still need health insurance to cover major medical expenses. An FSA only reimburses specific may be able to access expenses you pay for yourself.

What happens to my FSA if I go on unpaid leave?

If you take unpaid leave, your FSA coverage typically continues as long as you remain employed. However, your contributions may pause if you are not receiving a paycheck. Contact your plan administrator to confirm how unpaid leave affects your account.