How a Healthcare FSA Works and What You Can Use It For

A Healthcare FSA lets you set aside pre-tax money from your paycheck to pay for medical expenses 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 out-of-pocket medical, dental, and vision costs. Because the money goes in before federal income tax, Social Security tax, and Medicare tax are calculated, you reduce your taxable income for the year.

The account is "use-it-or-lose-it," meaning money you don't spend by the end of the plan year generally cannot roll over to the next year. Some employers offer a grace period of up to 2.5 months into the following year, or let you carry over up to $640 (this amount changes annually). You decide how much to contribute each year during your employer's open enrollment period, and that amount is divided across your paychecks.

Healthcare FSAs are different from Health Savings Accounts (HSAs). An HSA requires you to be enrolled in a high-deductible health plan and lets you keep unused money indefinitely. An FSA has no health plan requirement and is simpler to set up, but the money doesn't roll over unless your employer offers one of the carryover options.

Key Takeaways

• You contribute pre-tax dollars to a Healthcare FSA through payroll deduction, which lowers your taxable income for the year.
• You can use FSA funds to pay for copays, deductibles, prescription medications, dental work, vision care, and other may have access to medical expenses not covered by insurance.
• Money left in your account at the end of the plan year is forfeited unless your employer offers a grace period or carryover option.
• You must enroll in a Healthcare FSA during your employer's open enrollment period; you cannot start one outside of that window unless you have a may have access to life event.
• Healthcare FSAs are only available through employers; you cannot open one on your own.

What Expenses You Can Pay For With an FSA

The IRS maintains a list of may have access to medical expenses that FSA funds can cover. Common expenses include copays and coinsurance, deductibles, prescription medications, insulin, and medical equipment like blood glucose monitors or crutches. Dental work such as cleanings, fillings, root canals, and orthodontia is covered. Vision expenses including eye exams, glasses, contact lenses, and laser eye surgery are also may be able to access.

Some expenses people often assume are covered are not. Over-the-counter medications like cold medicine or pain relievers are not may be able to access unless you have a prescription. Cosmetic procedures, gym memberships, and vitamins are not covered. Toothpaste, sunscreen, and most personal hygiene products do not may have access to. If you are unsure whether a specific expense is may be able to access, your FSA plan administrator can confirm before you spend the money.

How Much You Can Contribute Each Year

The IRS sets an annual contribution limit for Healthcare FSAs. For 2024, the limit is $3,200 per person. This limit changes most years, so check with your employer or plan administrator for the current year's maximum. You choose your contribution amount during open enrollment, and that amount is locked in for the entire plan year.

Your contribution is divided evenly across all your remaining paychecks for the year. If you enroll mid-year after a may have access to life event (such as marriage, birth of a child, or loss of other health coverage), your contribution limit is reduced based on how many months remain in the plan year. Some employers also allow you to change your contribution amount if you experience a may have access to event during the year.

How to Use Your FSA and Track Your Balance

When you enroll in a Healthcare FSA, your employer or plan administrator gives you a debit card or instructions for submitting claims. Many FSAs issue a debit card that you can swipe at pharmacies, doctors' offices, and other healthcare providers. The card is linked to your FSA account and deducts the payment directly.

If your FSA does not issue a debit card, you pay out of pocket and then submit a claim form with a receipt to your plan administrator for reimbursement. This process typically takes one to two weeks. You can check your account balance online through your plan administrator's website or mobile app, which shows how much you have contributed, spent, and have remaining. Keep receipts for all FSA purchases in case your plan administrator requests documentation to verify the expense was may have access to.

The Use-It-or-Lose-It Rule and Carryover Options

At the end of your plan year, any money remaining in your Healthcare FSA is forfeited. This is the "use-it-or-lose-it" rule, and it applies to most FSAs. However, some employers offer one of two options to reduce this risk. A grace period allows you to spend down your FSA balance for an additional 2.5 months into the next calendar year. A carryover lets you roll up to $640 (for 2024) into the next plan year.

Your employer chooses whether to offer either option, and not all do. Check your plan documents or ask your benefits administrator which option, if any, your employer provides. If your employer offers neither, you should estimate your medical expenses carefully when choosing your contribution amount, since unspent money is lost.

When You Can Enroll and Make Changes

You can enroll in a Healthcare FSA only during your employer's open enrollment period, which typically occurs once per year in the fall for coverage starting January 1. If you are a new employee, you usually have 30 to 60 days from your hire date to enroll. Outside of these windows, you cannot start an FSA unless you experience a may have access to life event.

may have access to life events include marriage, divorce, birth or adoption of a child, loss of other health coverage, a significant change in your spouse's benefits, or a change in your employment status. When a may have access to event occurs, you usually have 30 to 60 days to enroll or make changes to your FSA contribution. Your employer's human resources or benefits department can tell you whether your situation qualifies and what documentation you need to provide.

Healthcare FSA vs. Other Savings Accounts

Healthcare FSAs are one of three main tax-advantaged accounts for medical expenses. A Health Savings Account (HSA) requires enrollment in a high-deductible health plan and lets you keep unused money indefinitely, making it better for long-term savings. However, HSAs have lower annual contribution limits than FSAs and are not available to everyone. A Dependent Care FSA is a separate account for childcare or adult dependent care expenses, not medical costs.

If your employer offers both an FSA and an HSA, you cannot contribute to both in the same year. An FSA is simpler to set up and has a higher contribution limit, but you lose unspent money. An HSA requires a specific health plan but offers more flexibility and better long-term value if you can afford to save the money. Your choice depends on your expected medical expenses, whether you have a high-deductible plan, and how much you want to save for future years.

Frequently Asked Questions

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

You generally lose access to your FSA balance when you leave your employer, even if you have unspent money. However, you may be able to continue coverage through COBRA for a limited time, which would let you use the remaining balance. Check with your employer's benefits administrator about COBRA may be able to access and the deadline to enroll.

Can I use my FSA debit card at any pharmacy or doctor's office?

Most pharmacies and medical providers accept FSA debit cards, but not all do. Some smaller practices or specialty providers may not have the infrastructure to process FSA payments. If a provider does not accept the card, you can pay out of pocket and submit a claim for reimbursement with your receipt.

Can I change my FSA contribution amount during the year?

You can change your contribution only if you experience a may have access to life event, such as marriage, birth of a child, or loss of other health coverage. Routine changes are allowed only during open enrollment. Contact your benefits administrator to find out whether your situation qualifies for a mid-year change.

Are FSA contributions taken out before or after my paycheck taxes?

FSA contributions are taken out before federal income tax, Social Security tax, and Medicare tax are calculated. This means your taxable income is reduced by the amount you contribute, lowering your overall tax bill for the year. The exact tax savings depends on your tax bracket.

What documentation do I need to keep for FSA expenses?

Keep receipts from pharmacies, doctors, dentists, and other healthcare providers for all FSA purchases. If you use a debit card, the transaction is recorded automatically. If you submit a claim form, attach the receipt to show the expense was may have access to. Your plan administrator may ask for documentation if there is any question about whether an expense is may be able to access.