A reimbursement account lets your employer set aside pre-tax money for you to spend on specific healthcare or dependent care costs

A reimbursement account is a special savings account your employer sets up where money comes out of your paycheck before taxes are taken out. You use that money to pay for may be able to access expenses — usually medical costs or childcare — and then you get reimbursed from the account when you submit receipts. The main benefit is that the money in the account is not taxed, which means you pay less in federal income tax and Social Security tax.

The most common types are a Flexible Spending Account (FSA) for healthcare expenses and a Dependent Care FSA for childcare costs. Some employers also offer a Health Savings Account (HSA), which works slightly differently but serves a similar purpose. These accounts exist because the government allows employers to help workers save on taxes for expenses they will pay anyway.

Key Takeaways

  • Money in a reimbursement account comes from your paycheck before taxes, so you save on federal income tax and Social Security tax on that money.
  • You choose how much to contribute each year during your employer's open enrollment period, and that amount is locked in until the next year.
  • You must have an may be able to access expense to be reimbursed — a healthcare FSA only covers medical, dental, and vision costs; a dependent care FSA only covers childcare.
  • Most reimbursement accounts have a "use it or lose it" rule, meaning money you do not spend by the end of the year is forfeited, though some employers offer a grace period or carryover.
  • You pay for the expense yourself first, then submit a receipt to the account administrator to get reimbursed.

How the money flows: from paycheck to reimbursement to your pocket

Here is the step-by-step process. During open enrollment — usually once a year, often in the fall — your employer tells you how much you can contribute to a reimbursement account. You decide on an amount and tell your employer. That amount is divided by the number of pay periods left in the year, and that portion comes out of each paycheck before taxes are calculated.

When you have an may be able to access expense, you pay for it yourself using your own money or card. Then you submit a claim to the account administrator (the company your employer hired to manage the account) with a receipt or proof of the expense. The administrator reviews it, confirms it is may be able to access, and sends you a reimbursement — either by check, direct deposit, or a debit card linked to the account.

The key point: you are not buying things with the account directly. You spend your own money first, then get paid back from the account.

Healthcare FSA: what counts as a medical expense

A Healthcare Flexible Spending Account (FSA) covers medical, dental, and vision costs that your health insurance does not pay for. This includes copays (the fixed amount you pay at a doctor visit), coinsurance (your share of the cost after insurance pays its part), deductibles (the amount you pay before insurance kicks in), and prescriptions.

It also covers some costs insurance typically does not cover at all, like dental work, glasses, contact lenses, hearing aids, and certain over-the-counter items if your doctor prescribes them. The IRS publishes a full list, but the general rule is: if it is a medical, dental, or vision cost that you would pay out of your own pocket, it probably counts.

What does not count: health insurance premiums, cosmetic procedures, gym memberships, and vitamins you buy without a prescription. If you are unsure whether something is may be able to access, you can ask the account administrator before you spend the money.

Dependent Care FSA: what counts as childcare

A Dependent Care FSA covers the cost of childcare while you work. This includes daycare centers, in-home daycare providers, preschool, and after-school care. It can also cover summer day camps and care for an adult dependent (like an aging parent) if that care allows you to work.

The expense must be for someone you claim as a dependent on your taxes, and the care must happen so you can work — not for entertainment or vacation. You cannot use it for school tuition at a K-12 school, though some preschool and pre-K programs do count. Like a healthcare FSA, you pay first and submit receipts for reimbursement.

The "use it or lose it" rule and what happens to unused money

Most reimbursement accounts have a strict rule: if you do not spend the money by the end of the plan year, you lose it. This is called the use-it-or-lose-it rule, and it exists because of tax law. The money you do not use does not roll over to next year and does not come back to you as a refund.

However, some employers offer a grace period — usually 2.5 months into the next year — during which you can still submit claims for expenses from the previous year. A smaller number of employers allow you to carry over a limited amount (often $500 or $610, depending on the account type) to the next year. Check your employer's plan documents to see if either option applies to you.

Because of this rule, it is important to estimate carefully how much you will actually spend. If you overestimate and lose money, that is a real cost. If you underestimate, you miss out on the tax savings.

How much you save in taxes

The tax savings depend on how much you contribute and your tax bracket. Here is a straightforward example: if you contribute $2,000 to a healthcare FSA and you are in the 22% federal tax bracket, you save roughly $440 in federal income tax. You also save Social Security and Medicare tax on that amount, which is another 7.65%, or about $153. That is roughly $593 in total tax savings on $2,000 contributed.

The exact amount varies based on your income, state taxes, and tax bracket. The lower your income, the smaller the percentage savings; the higher your income, the larger the percentage savings. A tax professional can give you a precise number for your situation, but the general principle is: the money you put in reduces your taxable income, which reduces your tax bill.

Health Savings Accounts (HSAs): a different kind of reimbursement account

A Health Savings Account (HSA) is similar to a healthcare FSA but works differently in important ways. An HSA is only available if you have a high-deductible health plan (a specific type of health insurance). The money you contribute is not taxed, and you can use it for the same medical, dental, and vision expenses as an FSA.

The big difference: an HSA does not have a use-it-or-lose-it rule. Money you do not spend rolls over to the next year and stays in the account indefinitely. You can also invest the money in the account like a retirement account. This makes an HSA more flexible and valuable if you can afford to contribute and not spend the money right away.

However, HSAs have lower contribution limits than FSAs, and you can only open one if your health insurance qualifies. Not all employers offer HSAs, and not all health plans are high-deductible plans.

Frequently Asked Questions

What happens if I do not use all the money in my reimbursement account by the end of the year?

You lose it. The money does not roll over, and you do not get it back as a refund. Some employers offer a grace period of 2.5 months into the next year to submit claims for prior-year expenses, or allow you to carry over a small amount (usually $500 to $610). Check your plan documents to see if your employer offers either option.

Can I change how much I contribute during the year?

Not usually. You choose your contribution amount during open enrollment, and it is locked in for the entire plan year. You can only change it if you have a may have access to life event — like a birth, marriage, divorce, or loss of other health coverage. Your employer's benefits team can tell you what counts as a may have access to event.

Do I need receipts to get reimbursed?

Yes. You must submit a receipt or proof of the expense to the account administrator. For medical expenses, this is usually an explanation of benefits from your insurance or an itemized receipt from the provider. For childcare, it is typically an invoice or receipt from the daycare or provider. Keep receipts for at least three years in case of an audit.

Can I use a reimbursement account if I am self-employed?

No. Reimbursement accounts are only available through an employer. 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, but that is the only option available to self-employed people.

What is the difference between an FSA and an HSA?

An FSA has a use-it-or-lose-it rule and higher contribution limits, but the money does not roll over. An HSA has lower contribution limits but the money rolls over indefinitely and you can invest it. HSAs are only available with high-deductible health plans. Both reduce your taxable income and save you on taxes.