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

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. That money sits in an account you control, and you withdraw it to pay for may have access to medical expenses or dependent care costs — depending on which type of FSA your employer offers. Because the contributions reduce your taxable income, you pay less in federal income tax and payroll taxes on the money you set aside.

The trade-off is strict: money you don't spend by the end of the plan year is forfeited. You cannot roll it over to the next year or take it out as a refund. This "use-it-or-lose-it" rule is the single most important thing to understand before you open an FSA. It shapes how much you should contribute and what you should buy with the account.

Key Takeaways

• FSA contributions come from your paycheck before taxes, which lowers your taxable income and the amount of federal income tax and payroll taxes you owe.
• Money left unspent at the end of the plan year is forfeited — you cannot carry it over or withdraw it, so you must estimate carefully how much you will spend.
• Medical FSAs cover doctor visits, prescriptions, dental work, vision care, and medical equipment; dependent care FSAs cover childcare and adult day care for dependents you claim on your taxes.
• You can change your FSA contribution only during open enrollment or if you have a may have access to life event such as a birth, marriage, or loss of other health coverage.
• Most employers offer FSAs through payroll deduction, and you receive a debit card or submit receipts to withdraw money from your account.

Two types of FSA: medical and dependent care

Most employers offer a medical FSA, sometimes called a healthcare FSA. This account covers out-of-pocket medical costs: copays, coinsurance, deductibles, prescription drugs, dental work, vision care, hearing aids, and medical equipment like crutches or glucose monitors. It does not cover health insurance premiums themselves, though it can cover premiums you pay for COBRA continuation coverage or certain other scenarios.

Some employers also offer a dependent care FSA, which covers childcare and adult day care for dependents you claim on your tax return. This includes daycare centers, nannies, after-school programs, and adult day care for an aging parent or disabled spouse. It does not cover overnight camps, tuition at a school (even if the school provides some care), or care for a spouse.

You can open both types of FSA in the same year if your employer offers both. The contribution limits are separate, and the money in each account is kept apart.

How much you can contribute and when

For 2024, the maximum contribution to a medical FSA is $3,200 per year. For a dependent care FSA, the limit is $5,000 per year (or $2,500 if you are married and file taxes separately). These limits change annually and are set by the IRS. Your employer may set a lower limit, so check your plan documents to see what your specific employer allows.

You choose your contribution amount during your employer's open enrollment period, which usually happens once a year in the fall. The money is deducted from your paycheck in equal installments throughout the year. If you have a may have access to life event — such as a birth, marriage, divorce, loss of other health coverage, or a significant change in dependent care costs — you may be able to change your contribution outside of open enrollment. Your employer's benefits office can tell you which events may have access to.

The use-it-or-lose-it rule and the grace period

Money you do not spend by December 31 (or the end of your employer's plan year, if different) is forfeited. You cannot roll it over to the next year, request a refund, or transfer it to another account. This is a federal rule that applies to all FSAs, and there are no exceptions.

Some employers offer a grace period of up to 2.5 months into the next year, during which you can spend down your previous year's balance. Not all employers offer this, so check your plan documents. Even with a grace period, any money still unspent after the grace period ends is lost.

Because of this rule, you should contribute only what you reasonably expect to spend. If you overestimate, you lose money. If you underestimate, you pay out of pocket for expenses that could have been covered tax-free.

How to use your FSA money

Most employers provide a debit card linked to your FSA account. You swipe it at the pharmacy, doctor's office, or other provider, and the cost is deducted from your balance. Some employers require you to submit receipts and request reimbursement instead. A few use both methods.

When you use the debit card, the provider may ask you to verify that the purchase is FSA-may be able to access. At a pharmacy, for example, over-the-counter medications are may be able to access only if you have a prescription from a doctor — the pharmacy system will flag them otherwise. At a medical supply store, the staff should know which items may have access to.

If you pay out of pocket and want reimbursement, keep your receipt and submit a claim form to your FSA administrator (usually the company that manages the account for your employer). Reimbursement typically takes one to two weeks. You can also save receipts and reimburse yourself years later, as long as the expense was incurred while the FSA was open.

FSA versus HSA: when to choose each

If your employer offers both an FSA and a Health Savings Account (HSA), you need to choose one or the other for medical expenses — you cannot have both in the same year. An HSA is available only if you are enrolled in a high-deductible health plan (HDHP), and unlike an FSA, unused money rolls over year to year and grows tax-free. An HSA is better if you expect to have ongoing medical expenses or want to save for retirement health costs.

An FSA makes sense if you have predictable, near-term medical costs and want to reduce your taxes immediately. For example, if you know you will need dental work or glasses this year, an FSA lets you pay for them with pre-tax money. If you are unsure how much you will spend, an HSA's rollover feature is safer because you do not lose unspent money.

You can have a dependent care FSA and an HSA at the same time — they do not conflict.

Common FSA-may be able to access expenses

Medical FSAs cover a long list of may have access to expenses. Copays and coinsurance for doctor visits, urgent care, and emergency room visits all may have access to. Prescription medications may have access to, but over-the-counter drugs do not unless you have a prescription. Dental work — fillings, cleanings, root canals, orthodontia — qualifies. Vision care including eye exams, glasses, and contact lenses qualifies. Hearing aids and batteries may have access to. Medical equipment such as crutches, wheelchairs, blood pressure monitors, and glucose meters may have access to.

Some expenses surprise people. Acupuncture qualifies if a doctor recommends it for a medical condition. Therapy copays may have access to. Fertility treatments and certain contraceptives may have access to. Insulin and diabetes supplies may have access to. Prescription sunglasses for medical conditions may have access to, but regular sunglasses do not.

Dependent care FSAs cover daycare centers, in-home nannies, after-school programs, and adult day care. The care must be for someone you claim as a dependent on your tax return, and it must allow you (and your spouse, if married) to work or look for work.

Frequently Asked Questions

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

You lose access to the account immediately. Any unspent balance is forfeited, even if you are in the middle of the plan year. Some employers allow you to continue using the account through the end of the plan year under COBRA, but you must pay the full premium yourself. Check with your employer's benefits office before you leave.

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

No. The debit card is restricted to FSA-may be able to access purchases. If you try to use it for ineligible items, the transaction will be declined. Some merchants may ask you to verify that your purchase is may be able to access before processing the card.

Do I need to submit receipts for every FSA purchase?

Not always. If you use the debit card, the transaction is usually recorded automatically. However, your FSA administrator may ask you to submit a receipt later to verify that the purchase was may be able to access. Keep receipts for at least three years in case you are asked to prove the expense.

Can I contribute to an FSA if I am self-employed?

No. FSAs are only available through employers. 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.

What if I have a baby during the year — can I increase my FSA contribution?

Yes, a birth is a may have access to life event. You can increase your dependent care FSA contribution to account for childcare costs. You typically have 30 to 60 days after the birth to notify your employer's benefits office. You cannot increase your medical FSA contribution unless you also lose other health coverage.