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, or FSA, is a workplace benefit that lets you put money aside before taxes are taken out of your paycheck. You then use that money to pay for medical expenses or childcare costs that you know are coming. The main advantage is that you avoid paying income tax and payroll tax on the money you set aside — so a $2,000 medical expense costs you less when you pay it from an FSA than when you pay it from your regular paycheck.

FSAs are offered by employers, not banks, and they are optional. If your employer offers one, you decide each year whether to participate and how much to contribute. The money stays in an account tied to your employer's plan, and you access it through a debit card, reimbursement forms, or both depending on how your plan works.

Key Takeaways

  • An FSA lets you set aside pre-tax money from your paycheck to pay for medical care, prescriptions, dental work, vision care, and dependent childcare.
  • You choose how much to contribute each year during your employer's open enrollment period, and that amount is deducted from your paycheck before taxes.
  • FSAs have a "use it or lose it" rule — money you do not spend by the end of the plan year is forfeited, though some plans allow a small carryover or grace period.
  • You access FSA money through a debit card, by submitting receipts for reimbursement, or both, depending on your plan's rules.
  • FSAs are separate from health insurance; you can have an FSA even if you have a high-deductible health plan, and the two work together to reduce your out-of-pocket costs.

How much you can contribute and when you choose

You decide how much to put into your FSA during your employer's open enrollment period, which usually happens once a year in the fall. The amount you choose is deducted from your paycheck in equal installments throughout the year. For 2024, the maximum contribution limit is set by the IRS and changes slightly year to year — your employer's benefits office can tell you the current limit.

The key is that you are guessing how much you will spend. If you know you need dental work, glasses, or childcare, you can estimate the cost and set aside that amount. If you set aside too much and do not spend it, you lose the unspent balance at the end of the year. This is called the "use it or lose it" rule, and it is the biggest reason some people are cautious about FSAs.

Some employers offer a small grace period (usually 2.5 months into the next year) or allow you to carry over a limited amount of unused money. Ask your benefits office whether your plan has either option, because it changes the math on how much to contribute.

What expenses you can pay for with FSA money

FSA money can cover a wide range of medical and care costs. Medical expenses include doctor visits, prescriptions, dental work, vision care, hearing aids, and medical equipment like crutches or blood pressure monitors. Dependent care expenses include daycare, after-school programs, and summer camps for children under age 13, as well as adult day care for a parent or other dependent you support.

Not everything counts. Cosmetic procedures, gym memberships, and over-the-counter vitamins are not covered. Some over-the-counter medicines and supplies are covered (like pain relievers and allergy medication), but others are not — your plan documents or your employer's benefits office can tell you what is allowed.

The IRS publishes a list of approved expenses, and your employer's plan may be more restrictive. When in doubt, ask your benefits office or check your plan's website before you spend the money.

How you access and use the money

Most FSAs come with a debit card that you swipe at the pharmacy, doctor's office, or daycare center. The card is linked to your FSA account, and the purchase is deducted from your balance. Some plans also let you submit receipts and request reimbursement by mail or through an online portal.

When you use the debit card, the provider may ask you to verify that the purchase is an approved FSA expense. If you use reimbursement forms instead, you will need to keep your receipt and submit it along with a claim form. Your plan administrator processes the claim and deposits the money into your bank account.

You can only use FSA money for expenses you incur during the plan year. If you have leftover money at the end of the year and your plan does not allow carryover, that money is forfeited — you cannot roll it into the next year or get it back as a refund.

FSAs versus health savings accounts

FSAs are often confused with health savings accounts, or HSAs, because both let you set aside pre-tax money for medical expenses. The main differences are that HSAs are only available if you have a high-deductible health plan, HSA money rolls over year to year (there is no "use it or lose it" rule), and you can invest HSA money like a retirement account. FSAs have lower contribution limits, stricter rules about what you can spend on, and the use-it-or-lose-it important date.

You can have both an FSA and an HSA at the same time, as long as your FSA is limited to dependent care only. If your FSA covers medical expenses, you cannot also have an HSA. Your employer's benefits office can explain which combination is available to you.

What happens to your FSA if you leave your job

If you leave your job before the end of the plan year, you lose access to your FSA account. Any money you have not spent is forfeited — you cannot take it with you or roll it into a new employer's plan. This is one reason to be conservative about how much you contribute if you think you might change jobs during the year.

Some employers allow you to continue using your FSA for a limited time after you leave through COBRA, a federal law that lets you keep certain workplace benefits. You would pay the full cost yourself (both the employee and employer portions), which is usually expensive. Check with your employer's benefits office about whether COBRA is available for FSAs.

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 a birth, marriage, divorce, or significant change in childcare costs. Outside of those events, your contribution amount is locked in for the year. Your benefits office can tell you which events may have access to.

What happens if I submit a receipt for an expense that is not covered?

Your plan administrator will deny the reimbursement and ask you to pay for the expense yourself. If you used the debit card, the transaction may be flagged and you could be asked to provide proof that it was an approved expense. Keep receipts for at least three years in case you need to show proof.

Can I use FSA money for my spouse's medical expenses?

Yes, as long as you file taxes jointly. You can also use it for your children and any other dependent you claim on your tax return. The money does not have to be spent on the person whose name is on the account.

Is there a penalty for not spending all my FSA money?

No penalty — you straightforward lose the unspent balance. There is no tax consequence or fine. This is why it is important to estimate carefully and take advantage of any carryover or grace period your plan offers.

Can I use FSA money to pay my health insurance premium?

No, FSA money cannot be used to pay your health insurance premium or your employer's share of your premium. You can use it for out-of-pocket costs like copays, deductibles, and coinsurance.