What an FSA Is and How It Works

A Flexible Spending Account lets you set aside pre-tax money for medical and dependent care costs

A Flexible Spending Account (FSA) is an employer-sponsored savings plan where you contribute money before taxes are taken out of your paycheck. You then use that money to pay for may be able to access medical expenses or dependent care costs throughout the year. The tax savings come from the fact that the money you put in reduces your taxable income — you pay no federal income tax, Social Security tax, or Medicare tax on those contributions.

FSAs come in two types: a medical FSA (sometimes called a healthcare FSA) and a dependent care FSA. Most employers offer the medical version, some offer both, and a few offer only dependent care. You choose which type to open during your employer's open enrollment period, usually once per year. The money is held in an account managed by a third-party administrator, not by your employer directly.

The trade-off is a rule called "use it or lose it": money you don't spend by the end of the plan year generally cannot be carried over to the next year. Some employers allow a small carryover (up to $610 in 2024, though this amount changes yearly) or a grace period of up to 2.5 months into the next year, but you should check your specific plan documents to know what applies to you.

Key Takeaways

• FSA contributions come out of your paycheck before taxes, reducing both your income tax and payroll taxes for the year.
• You must choose your FSA contribution amount during open enrollment and cannot change it mid-year unless you have a may have access to life event.
• Medical FSAs cover copays, deductibles, prescriptions, dental work, vision care, and many other out-of-pocket health costs; dependent care FSAs cover childcare and adult daycare expenses.
• Unused FSA money at the end of the plan year is forfeited unless your employer offers a carryover or grace period.
• You access FSA money through a debit card, reimbursement request, or direct payment to providers, depending on your plan administrator.

How much you can contribute and when

The IRS sets annual limits on how much you can contribute to each type of FSA. For 2024, the medical FSA limit is $3,200 per person per year, and the dependent care FSA limit is $5,000 per household per year (or $2,500 if you are married and file taxes separately). These limits change each year, so check your plan documents or your employer's benefits website for the current year's cap.

You decide your contribution amount during open enrollment, which typically happens once per year in the fall for coverage starting January 1. You cannot change your contribution mid-year unless you have a may have access to event — marriage, divorce, birth or adoption of a child, loss of other health coverage, or a significant change in dependent care costs. If you miss open enrollment, you generally cannot open an FSA until the following year's enrollment period.

Your contributions are divided evenly across your paychecks for the rest of the plan year. If you contribute $2,400 to a medical FSA and are paid twice monthly, roughly $100 comes out of each paycheck before taxes.

What medical FSA money can pay for

A medical FSA covers most out-of-pocket health care costs that you pay yourself. This includes copays and coinsurance (your share of the cost after insurance pays), deductibles, prescription medications, dental work, vision care including glasses and contacts, hearing aids, and medical equipment like crutches or blood pressure monitors. You can also use it for mental health counseling, physical therapy, and many over-the-counter items if a doctor prescribes them in writing.

The IRS maintains a detailed list of may be able to access expenses, but the practical rule is: if it is a health care cost you would normally pay out of your own pocket, an FSA can cover it. Expenses that are not covered include cosmetic procedures, gym memberships, vitamins (unless prescribed), and most over-the-counter items without a prescription.

You cannot use a medical FSA to pay your insurance premiums, though you can use a separate account called a Health Savings Account (HSA) for that if you have a high-deductible health plan. The two accounts serve different purposes and have different rules.

What dependent care FSA money can pay for

A dependent care FSA covers the cost of care for children under age 13 or for a spouse or parent who is unable to care for themselves, but only if that care allows you (and your spouse, if married) to work or look for work. may be able to access expenses include daycare centers, preschool, after-school programs, summer day camps, and in-home babysitters or nannies.

The care must be provided by someone other than a spouse or a dependent you claim on your taxes. You cannot use dependent care FSA money to pay a teenage child to watch younger siblings, and you cannot use it for overnight camps or school tuition (even if the school provides before- and after-school care).

One important rule: if you are married, both spouses must be working or in school full-time for the expenses to be may be able to access. If one spouse stays home, dependent care FSA money cannot be used, even if the other spouse works.

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 other providers. When you swipe the card, the administrator checks whether the merchant typically sells may be able to access items. If the merchant is a pharmacy or medical office, the transaction usually goes through without question. If the merchant is ambiguous (like a grocery store that sells both food and over-the-counter items), you may be asked to submit a receipt or prescription to prove the purchase was may be able to access.

If your plan does not issue a debit card, or if a provider does not accept it, you can pay out of pocket and then submit a reimbursement request. You will need to send the plan administrator an itemized receipt and sometimes a prescription or letter from your doctor stating the expense was medically necessary. Reimbursement typically takes one to two weeks.

Some employers allow you to submit expenses for reimbursement through a mobile app or online portal, which speeds up the process. Keep all receipts and documentation for at least three years in case the IRS or your plan administrator asks to verify your spending.

The use-it-or-lose-it rule and how to plan around it

Money left in your FSA at the end of the plan year is forfeited — you cannot roll it over to the next year or withdraw it. This is the biggest drawback of FSAs compared to Health Savings Accounts. Because of this rule, you should estimate your health care or dependent care costs carefully before you commit to a contribution amount.

Some employers soften this rule by offering a carryover, which allows you to carry up to $610 (in 2024) into the next plan year. Others offer a grace period of up to 2.5 months after the plan year ends during which you can still submit claims for expenses incurred in the previous year. A few employers offer both. Check your plan documents or ask your benefits administrator which option, if any, your employer provides.

If you are unsure how much to contribute, start conservatively — contribute only the amount you are confident you will spend. You can increase your contribution next year if you find you had money left over.

FSA vs. HSA: when to choose each

If your employer offers both an FSA and a Health Savings Account (HSA), you need to understand the key differences. An HSA is only available if you are enrolled in a high-deductible health plan (HDHP), and it has much higher contribution limits and no use-it-or-lose-it rule — money rolls over year to year and can be invested. An FSA has lower limits and forfeits unused money, but it is available with any type of health insurance.

If you have access to an HSA and a high-deductible plan, an HSA is usually the better choice because of the carryover feature and investment potential. If you do not have an HDHP, or if you want to set aside money for dependent care, an FSA may be your only option. Some people use both: an HSA for long-term health savings and an FSA for predictable near-term expenses like dental work or childcare.

Frequently Asked Questions

Can I change my FSA contribution amount during the year?

No, unless you have a may have access to life event such as marriage, divorce, birth or adoption of a child, loss of other health coverage, or a significant change in dependent care costs. If you have a may have access to event, you usually have 30 to 60 days to make changes. Otherwise, you are locked into your contribution amount for the entire plan year.

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

You generally lose access to your FSA when you leave your employer. However, you have a limited time (usually 60 to 90 days) to submit claims for expenses you incurred while you were employed. After that window closes, any remaining balance is forfeited. Some employers allow you to continue FSA coverage under COBRA, but you would pay the full premium yourself.

Can I use my FSA debit card for anything other than medical expenses?

No. The debit card is restricted to may be able to access FSA expenses only. If you try to use it for ineligible items, the transaction will be declined. Some merchants may allow you to split a transaction (paying with the FSA card for may be able to access items and another payment method for ineligible items), but this depends on the merchant and the plan administrator.

Do I need to submit receipts for every FSA purchase?

Not always. If you use the FSA debit card at a pharmacy or doctor's office, the transaction usually goes through without requiring a receipt. If you use it at a merchant that sells mixed items (like a grocery store), or if you submit a reimbursement request, you will need to provide a receipt and possibly a prescription or doctor's letter to prove the expense was may be able to access.

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

Yes, you can use your FSA to pay for may be able to access medical expenses for your spouse and any dependents you claim on your taxes. The money in your FSA account is not limited to your own health care — it covers any family member's may be able to access out-of-pocket costs.