What an FSA Is and How It Works

An FSA is a tax-advantaged account where you set aside pre-tax money to pay for may be able to access medical and dependent care costs

A Flexible Spending Account (FSA) lets you contribute money from your paycheck before taxes are taken out, then use that money to pay for certain medical expenses or dependent care. The tax savings come from the fact that the money you put in reduces your taxable income for the year. If you spend $2,500 from an FSA on may be able to access expenses, you avoid paying income tax and payroll tax on that $2,500.

FSAs are offered through your employer's benefits plan. You enroll during your company's open enrollment period, usually once a year. The money comes directly from your paycheck in equal amounts throughout the year, and you can withdraw it as you incur may be able to access expenses.

There are two main types: a health care FSA for medical, dental, and vision costs, and a dependent care FSA for child care or adult day care expenses. Some employers offer both, and you can use them at the same time.

Key Takeaways

• FSA contributions reduce your taxable income, which means you pay less in federal income tax and payroll tax on the money you set aside.
• You choose how much to contribute each year during open enrollment, and the money is deducted from your paycheck in equal installments.
• A health care FSA covers copays, deductibles, prescriptions, and many other medical expenses; a dependent care FSA covers child care or adult day care.
• Money left in your FSA at the end of the year is forfeited under the "use-it-or-lose-it" rule, though some employers offer a grace period or carryover of up to $660.
• You must be enrolled in your employer's health plan to use a health care FSA, but dependent care FSAs have no health plan requirement.

How much you can contribute and when

The IRS sets an annual limit on how much you can put into a health care FSA. For 2024, that limit is $3,200 per person. For dependent care FSAs, the limit is $5,000 per household per year (or $2,500 if you are married and file taxes separately).

You decide your contribution amount during your employer's open enrollment period, which usually happens once a year in the fall or winter. You tell your employer how much to deduct from each paycheck, and they spread that total evenly across all remaining pay periods for the year.

If you have a major life change — such as the birth of a child, marriage, divorce, or loss of health coverage — you can change your FSA contribution outside of open enrollment. Your employer's benefits administrator can tell you which events may have access to and how quickly you need to notify them.

What you can and cannot pay for with an FSA

A health care FSA covers most medical, dental, and vision expenses that you would pay out of pocket. This includes copays, coinsurance, deductibles, prescription medications, glasses, contact lenses, hearing aids, and dental work. It does not cover health insurance premiums, over-the-counter medications (unless prescribed by a doctor), cosmetic procedures, or gym memberships.

A dependent care FSA pays for child care or adult day care that allows you to work. This includes day care centers, in-home nannies, after-school programs, and adult day care for an aging parent. It does not cover overnight camps, tuition for school or college, or care provided by a spouse or a dependent you claim on your taxes.

The IRS maintains a detailed list of may be able to access expenses for both types of FSA. If you are unsure whether a specific cost qualifies, ask your FSA plan administrator or check the IRS Publication 502 (for health care) or Publication 503 (for dependent care).

The use-it-or-lose-it rule and carryover options

Money left unspent in your FSA at the end of the calendar year is forfeited — you cannot roll it over to the next year or get it back. This is called the "use-it-or-lose-it" rule, and it is one of the biggest drawbacks of FSAs. If you contribute $2,000 and spend only $1,500, you lose the remaining $500.

However, some employers offer a grace period or a carryover to soften this rule. A grace period gives you an extra 2.5 months (until March 15 of the following year) to spend money from the previous year's FSA. A carryover allows you to roll up to $660 (for 2024) into the next year's FSA. Your employer chooses whether to offer either option, so check your plan documents to see what applies to you.

Because of this rule, it is important to estimate your expenses carefully when you choose your contribution amount. Many people contribute a conservative amount to avoid forfeiting money.

How to use your FSA when you have an expense

When you incur an may be able to access expense, you pay for it out of pocket, then request reimbursement from your FSA plan administrator. Most plans give you a debit card that you can use at pharmacies, doctor's offices, and other providers, which makes the process instant. If your plan does not offer a debit card, you pay and then submit a claim form with a receipt.

To submit a claim, you typically log into your plan's website or mobile app, upload a photo of your receipt, and request reimbursement. The plan administrator reviews it to confirm it is an may be able to access expense, then deposits the money into your bank account or sends you a check. This usually takes a few business days.

Keep all receipts and documentation for at least three years in case the IRS or your plan administrator asks to verify your expenses. Some plans require you to submit a receipt before they will reimburse you; others reimburse first and ask for documentation only if they audit your account.

FSA versus HSA: when each makes sense

If your employer offers both an FSA and a Health Savings Account (HSA), you need to choose one or the other for health care expenses — you cannot use both in the same year. An HSA is available only if you are enrolled in a high-deductible health plan (HDHP), and it has higher contribution limits ($4,150 for individual coverage in 2024). Unlike an FSA, an HSA lets you roll over unused money year to year, and you can invest it for long-term growth.

An FSA makes sense if you have predictable medical expenses each year and want to reduce your taxes on money you know you will spend. An HSA makes sense if you have a high-deductible plan, can afford to contribute more, and want to build a long-term health savings cushion. Some people with an HDHP contribute to an HSA and also use a dependent care FSA, since the two do not conflict.

What happens to your FSA when you leave your job

If 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. Any money you have not yet spent is forfeited, even if you contributed it.

However, you may be able to continue coverage under COBRA (Consolidated Omnibus Budget Reconciliation Act), which lets you keep your FSA for a limited time after you leave. COBRA continuation is expensive because you pay both the employee and employer share of the premium, but it does let you finish spending the money you contributed. Check with your former employer's benefits administrator to see if COBRA is available for your FSA.

If you move to a new job with a different employer, you can enroll in that employer's FSA during your new company's open enrollment period or within 30 days of your hire date, depending on the plan.

Frequently Asked Questions

Can I change my FSA contribution amount during the year?

Only if you have a may have access to life event, such as birth, marriage, divorce, or loss of health coverage. A change in your income or a desire to contribute more does not may have access to. Contact your employer's benefits administrator immediately after a life event to request a change.

What happens if I do not spend all my FSA money by the end of the year?

You forfeit it under the use-it-or-lose-it rule, unless your employer offers a grace period (until March 15) or a carryover (up to $660). Check your plan documents or ask your benefits administrator which option your employer provides.

Can I use my FSA debit card at any store?

No. FSA debit cards work only at pharmacies, medical offices, dental offices, vision providers, and other merchants that sell may be able to access health care items. They will not work at grocery stores or general retailers, even if those stores sell some may be able to access items like bandages.

Do I need to be enrolled in my employer's health plan to use an FSA?

You must be enrolled in a health plan to use a health care FSA. You do not need to be enrolled in a health plan to use a dependent care FSA, though most people who use it are.

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

Yes, as long as you claim them as dependents on your tax return or they are your spouse. You can also use it for your own expenses. The money does not have to be spent on the person whose name is on the account.