How a Flexible Spending Account Works and What You Can Use It For

A Flexible Spending Account lets you set aside pre-tax money from your paycheck to pay for medical and dependent care costs

A Flexible Spending Account (FSA) is an employer-sponsored account where you contribute money before taxes are taken out of your paycheck. You then use that money to pay for medical expenses or dependent care costs that your health insurance does not cover, or to cover the out-of-pocket portions of care that it does. The main benefit is that you avoid paying federal income tax, Social Security tax, and Medicare tax on the money you set aside — which typically saves you 20 to 40 percent compared to paying with after-tax dollars.

FSAs come in two types: a medical FSA (sometimes called a healthcare FSA) for medical, dental, and vision expenses, and a dependent care FSA for daycare, after-school programs, and adult day care. You cannot use one type of FSA for the other type of expense. Most employers offer the medical FSA, some offer the dependent care FSA, and a smaller number offer both.

Key Takeaways

• You choose how much to contribute each year during your employer's open enrollment period, and the money comes out of your paycheck before taxes.
• Medical FSAs have a maximum contribution of $3,300 per year (for 2024), while dependent care FSAs cap out at $5,000 per year for married couples filing jointly or single filers, and $2,500 for married couples filing separately.
• You must use the money within the plan year or lose it — there is no rollover to the next year, though some employers offer a grace period of up to 2.5 months.
• FSAs are only available through an employer; you cannot open one on your own, and you lose access to the account if you leave your job.
• You pay for the expense out of pocket first, then submit a receipt to your FSA administrator to be reimbursed from your account.

How much you can contribute and what the limits are

For 2024, the maximum contribution to a medical FSA is $3,300 per year. For a dependent care FSA, the limit is $5,000 per year if you are married filing jointly or single, and $2,500 if you are married filing separately. These limits are set by the IRS and change most years — your employer will tell you the current limit during open enrollment.

You decide how much to contribute when you enroll, usually once a year during your employer's open enrollment period. The money is divided evenly across your paychecks for the rest of the year. If you enroll mid-year, the contributions are spread across the remaining paychecks. You cannot change your contribution amount during the year unless you have a may have access to life event, such as the birth of a child, a change in your spouse's employment, or a significant change in your dependent care costs.

What medical expenses you can pay for with an FSA

A medical FSA covers a broad range of out-of-pocket health care costs. This includes copayments, coinsurance, and deductibles for doctor visits, hospital care, and prescription medications. It also covers dental work (fillings, crowns, orthodontia), vision care (glasses, contact lenses, eye exams), and hearing aids. You can use FSA money for over-the-counter medications only if you have a prescription from a doctor, even for common items like pain relievers or allergy medicine.

The IRS publishes a detailed list of what counts as a medical expense. Some less obvious items that may have access to include insulin, diabetic supplies, crutches, wheelchairs, acupuncture, therapy copayments, and certain medical equipment. Items that do not may have access to include cosmetic procedures, vitamins (unless prescribed for a specific medical condition), gym memberships, and general wellness products. If you are unsure whether an expense qualifies, your FSA administrator can tell you before you spend the money.

What dependent care expenses you can pay for with an FSA

A dependent care FSA covers the cost of care for children under age 13 or for a spouse or parent who cannot care for themselves and lives with you. This includes daycare centers, in-home nannies, after-school programs, summer camps, and adult day care facilities. The care must allow you (and your spouse, if married) to work or to look for work.

The expense must be for care provided by someone who is not your spouse, your child, or a dependent you claim on your taxes. You cannot use dependent care FSA money to pay a relative, even if they provide childcare. The care provider must also have a tax ID number or Social Security number, which you will need to provide to your FSA administrator.

The use-it-or-lose-it rule and grace periods

Money in an FSA does not roll over to the next year. If you do not spend what you contributed by the end of the plan year, you lose it — the IRS does not allow FSA funds to be carried forward. This is the biggest drawback of an FSA compared to a Health Savings Account (HSA), which lets you save money indefinitely.

Some employers offer a grace period of up to 2.5 months after the plan year ends, during which you can still spend money from the previous year's account. Not all employers offer this, so check your plan documents. A few employers also offer a carryover of up to $610 per year (for 2024), but this is less common. Because of the use-it-or-lose-it rule, you should estimate conservatively when you choose your contribution amount — it is better to contribute less and have money left over than to contribute too much and forfeit it.

How to get reimbursed from your FSA

When you incur a medical or dependent care expense, you pay for it out of pocket using your regular money or a credit card. You then submit a claim to your FSA administrator with a receipt or invoice showing what you paid for. Most administrators let you submit claims online through a website or mobile app, by mail, or by phone.

The administrator reviews your claim to make sure the expense qualifies under the plan rules. If it does, they reimburse you within a few business days, usually by depositing money into your bank account or sending you a check. Some employers issue an FSA debit card that you can use at the point of sale for certain expenses, like pharmacy purchases or doctor copayments, which skips the reimbursement step. However, you still need to keep receipts in case the administrator asks for proof later.

FSA vs. HSA: when each one makes sense

An HSA (Health Savings Account) is similar to an FSA but has key differences. An HSA lets you save money year after year without losing it, and you can invest the money once it reaches a certain balance. However, you can only open an HSA if you are enrolled in a high-deductible health plan (HDHP), which most people with traditional health insurance cannot do. An FSA is available to anyone whose employer offers it, regardless of what health plan they choose.

If your employer offers both an HSA and an FSA, you cannot contribute to both in the same year — you have to choose one. If you have an HDHP and expect significant medical expenses, an HSA is usually the better choice because you keep the money. If you have a traditional health plan or expect to use up most of what you contribute each year, an FSA makes sense because it saves you taxes on money you would spend anyway.

What happens to your FSA if you leave your job

When you leave your job, you lose access to your FSA immediately. You cannot take the account with you or transfer it to a new employer. If you have money left in the account, you forfeit it — even if you leave partway through the year and have only used part of what you contributed.

Some employers allow you to continue coverage under COBRA (Consolidated Omnibus Budget Reconciliation Act), which lets you keep your FSA for a limited time after you leave, but you have to pay the full cost yourself plus an administrative fee. COBRA continuation is expensive and rarely worth it for an FSA. If you are changing jobs, try to time your FSA contributions so you use most of the money before you leave, or contribute a smaller amount if you think you might leave during the year.

Frequently Asked Questions

Can I use my FSA for my spouse or children?

Yes, you can use a medical FSA to pay for medical expenses for your spouse and children, even if they are not on your health insurance plan. For a dependent care FSA, you can only use it for children under 13 or for a spouse or parent who cannot care for themselves and lives with you. The dependent must be claimed as your dependent on your tax return.

What happens if I contribute too much and have money left over?

You lose the money at the end of the plan year unless your employer offers a grace period or carryover. To avoid this, estimate your expenses conservatively and contribute only what you are confident you will spend. If your expenses change mid-year due to a life event, you may be able to lower your contribution.

Can I use my FSA to pay for my pet's medical care?

No. FSA funds can only be used for medical care for you, your spouse, and your dependents. Veterinary expenses do not may have access to, even if the pet is a service animal. However, if you have a service dog that is trained to perform a specific task for a disability, the cost of training and care may may have access to under certain circumstances — check with your FSA administrator.

Do I need receipts to prove my FSA expenses?

Yes. You must keep receipts or invoices for all FSA expenses. The administrator may ask you to provide proof that an expense qualifies, especially if it is unusual or if the description on the receipt is unclear. If you cannot provide proof, the administrator can deny the claim and you will not be reimbursed.

Can I open an FSA on my own without an employer?

No. FSAs are only available through employers. If your employer does not offer an FSA, you cannot open one independently. If you have a high-deductible health plan, you may be able to open an HSA instead, which you can manage on your own.