What an FSA Is and How It Works

An FSA is a tax-advantaged savings account for medical and dependent care expenses

A Flexible Spending Account (FSA) is an employer-sponsored account that lets you set aside pre-tax money to pay for certain out-of-pocket health care and dependent care costs. Money you contribute is deducted from your paycheck before income tax is calculated, which lowers your taxable income for the year. You then use the account to reimburse yourself for may be able to access expenses.

FSAs come in two types: a health care FSA (sometimes called a medical FSA) and a dependent care FSA. Most employers offer the health care version, which covers things like copays, deductibles, prescription drugs, and dental work. A dependent care FSA covers costs for child care or adult day care that allows you to work.

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 — you cannot carry it forward. Some employers offer a grace period of up to 2.5 months into the next year, or a carryover of up to $610 (the amount changes yearly), but most do not. This means you need to estimate carefully how much you will actually spend.

Key Takeaways

• FSA contributions are deducted from your paycheck before taxes, reducing the amount of income tax you owe that year.
• You can only open or change your FSA election during your employer's open enrollment period, usually once per year in the fall.
• Money left in your FSA at the end of the plan year is forfeited unless your employer offers a grace period or carryover option.
• Health care FSAs typically have annual contribution limits set by the IRS, which change each year and vary from dependent care FSAs.
• You must have a may have access to life event (birth, marriage, loss of coverage) to change your FSA election outside of open enrollment.

How the tax savings work

The tax benefit comes from the fact that FSA contributions are taken out of your paycheck before federal income tax, Social Security tax, and Medicare tax are calculated. If you contribute $2,500 to a health care FSA and you are in the 22% federal tax bracket, you save roughly $550 in federal taxes alone, plus additional savings on state and payroll taxes depending on where you live.

This is different from a Health Savings Account (HSA), where you can deduct contributions on your tax return even if you do not itemize deductions. With an FSA, the tax break happens automatically through payroll deduction — you do not have to do anything extra at tax time.

The catch is that you only save taxes on money you actually spend. If you contribute $2,500 but only spend $1,800, you have forfeited the tax savings on the remaining $700 (unless your employer allows a carryover or grace period).

FSA contribution limits and who can open one

Your employer sets up the FSA plan, so you can only open one if your employer offers it. You cannot open an FSA on your own through a bank or insurance company the way you can with an HSA.

For 2024, the IRS limit for health care FSA contributions is $3,200 per year. For dependent care FSAs, the limit is $5,000 per year (or $2,500 if you are married and filing separately). These limits change annually. Your employer may set a lower limit, but cannot exceed the IRS maximum.

You must be employed by the company offering the FSA to participate. If you leave your job, your FSA account closes, though you may have a limited time to spend remaining funds or convert it to a different account type under COBRA rules.

What expenses you can pay for with an FSA

A health care FSA covers most medical, dental, and vision expenses that are not covered by insurance or that require you to pay out of pocket. This includes copays, coinsurance, deductibles, prescription medications, glasses and contact lenses, dental fillings and cleanings, orthodontia, hearing aids, and certain medical equipment like crutches or blood pressure monitors.

Over-the-counter medications are covered only if you have a prescription from a doctor. Cosmetic procedures, vitamins (unless prescribed for a medical condition), and gym memberships are not covered. The IRS maintains a detailed list of may be able to access expenses, and your plan administrator can tell you whether a specific item qualifies.

A dependent care FSA covers costs for child care (day care, preschool, after-school programs, summer camp) or adult day care that allows you to work. It does not cover overnight camps, tuition for school (K–12 or college), or care provided by a spouse or a dependent child under 19.

The use-it-or-lose-it rule and how to avoid losing money

At the end of each plan year, any money remaining in your FSA that you have not spent is forfeited. You cannot roll it over to the next year, and you cannot withdraw it as cash. This is a federal rule that applies to all FSAs, regardless of employer.

Some employers offer a grace period of up to 2.5 months into the following year to spend remaining funds. Others offer a carryover of up to $610 (for 2024) into the next year. A few employers offer both. Check your plan documents or ask your benefits administrator which option, if any, your employer provides.

To avoid forfeiture, estimate conservatively. Look at your actual medical and dependent care spending from the past two years, add a small buffer for unexpected costs, and contribute that amount. If you have a major expense coming (a planned surgery, new glasses, or increased child care), you can contribute more. If your circumstances change mid-year (you have a baby, your child starts school, you lose coverage), you may be able to change your election.

FSA vs. HSA: which is better for you

An FSA and an HSA are both tax-advantaged accounts for health care costs, but they work differently and have different rules. An FSA is employer-sponsored and has the use-it-or-lose-it rule. An HSA is individual-owned, lets you carry money forward indefinitely, and requires you to be enrolled in a high-deductible health plan.

If your employer offers both, you cannot have an FSA and an HSA at the same time. If your employer offers an HSA with a high-deductible plan, an HSA is usually the better choice because you keep the money year to year and can invest it for long-term growth. If your employer only offers an FSA, or if you have a traditional health plan, an FSA can still save you money on taxes if you can predict your spending accurately.

A dependent care FSA has no direct competitor — there is no dependent care HSA. If you pay for child care or adult day care, a dependent care FSA is the only tax-advantaged account available through an employer.

How to enroll and when you can make changes

You enroll in an FSA during your employer's open enrollment period, which typically happens once per year in the fall for coverage starting January 1. Your employer sends out plan materials, and you choose how much to contribute for the coming year. The money is then deducted from each paycheck.

Outside of open enrollment, you can change your FSA election only if you have a may have access to life event: birth or adoption of a child, marriage or divorce, loss of health coverage, a significant change in child care costs, or a change in your spouse's employment or benefits. You must request the change within 30 to 60 days of the event (rules vary by employer).

If you do not enroll during open enrollment and do not have a may have access to life event, you cannot open an FSA until the next open enrollment period. Once the plan year starts, you are locked into your contribution amount unless a may have access to event occurs.

Frequently Asked Questions

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

Your FSA account closes when you leave your employer. You may have a limited time (usually 60 to 90 days) to spend remaining funds, depending on your plan. After that, any unspent money is forfeited. You cannot transfer an FSA to a new employer or convert it to a personal account.

Can I use my FSA debit card for anything, or only may be able to access expenses?

Many employers issue FSA debit cards that work only for may be able to access expenses at pharmacies, doctor offices, and medical suppliers. Some merchants may decline the card if the purchase does not match an may be able to access category. You can always pay out of pocket and request reimbursement from your FSA instead, which gives you more flexibility.

Do I need to keep receipts for FSA expenses?

Yes. Your plan administrator may ask you to submit receipts to prove an expense was may be able to access, especially if you use a debit card or request reimbursement. Keep receipts for at least three to five years in case of an audit. Some employers spot-check claims; others only ask for documentation if something looks unusual.

Can I open an FSA if I am self-employed?

No. FSAs are employer-sponsored plans only. If you are self-employed, you cannot open an FSA. You may be able to open an HSA if you have a high-deductible health plan, or you can deduct certain medical expenses on your tax return, but there is no self-employed FSA option.

What if I estimate wrong and run out of FSA money mid-year?

Once your FSA balance is spent, you cannot access more money until the next plan year. You will have to pay out of pocket for any remaining medical or dependent care expenses. This is another reason to estimate conservatively and contribute less rather than more.