What an FSA is and how it differs from an HSA

A Flexible Spending Account (FSA) is a workplace account where you set aside pre-tax money to pay for medical expenses. Your employer takes the money from your paycheck before taxes are calculated, which lowers your taxable income for the year. You then use that money to pay for things like copays, deductibles, prescription drugs, and certain medical supplies — expenses you would pay anyway, but now without paying income tax on that portion of your salary.

The main difference between an FSA and an HSA is that an FSA is "use it or lose it." 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. An HSA, by contrast, rolls over year to year and grows like a savings account. FSAs also require you to be enrolled in a health plan through your employer, while HSAs work with certain high-deductible plans and are portable if you change jobs.

FSAs are simpler to understand than HSAs because there is no investment component and no long-term savings strategy. You decide how much to set aside each year, spend it on medical costs, and start fresh the next year.

Key Takeaways

  • An FSA lets you set aside pre-tax money from your paycheck to pay for medical expenses, reducing the income tax you owe that year.
  • Money in an FSA must be spent by the end of the plan year or it returns to your employer — there is no rollover to the next year.
  • You choose how much to contribute each year during your employer's open enrollment period, and that amount is deducted from each paycheck.
  • FSAs cover copays, deductibles, prescription drugs, and certain medical supplies, but not health insurance premiums or over-the-counter items without a prescription.
  • You access FSA money through a debit card, reimbursement form, or direct payment to providers, depending on how your plan is set up.

How much you can set aside and when

Your employer sets the maximum amount you can contribute to an FSA each year. The IRS sets a legal limit (which changes annually), but your employer may set a lower limit. You decide your contribution amount during open enrollment, which typically happens once a year in the fall for coverage starting January 1.

Once you choose an amount, that is your commitment for the entire year. Your employer divides it by the number of paychecks and deducts that amount from each check before calculating your taxes. If you have a major life change — a new baby, loss of health coverage, marriage, or divorce — you may be able to change your contribution mid-year, but routine changes are only allowed during open enrollment.

The key decision is estimating how much medical spending you will actually have. If you set aside too much, you lose the unused balance. If you set aside too little, you pay out of pocket for expenses that could have been pre-tax. Many people start by looking at what they spent on medical costs in the previous year.

What expenses an FSA covers

An FSA covers most medical expenses that you would pay out of your own pocket. This includes copays (the fixed amount you pay when you see a doctor), coinsurance (your percentage of the bill after insurance pays its share), deductibles (the amount you pay before insurance kicks in), and prescription medications. You can also use FSA money for dental work, vision care, hearing aids, and certain medical equipment like crutches or blood pressure monitors.

The IRS maintains a detailed list of what counts as a medical expense. Some items that surprise people: you can use FSA money for acupuncture, chiropractic care, therapy sessions, and even certain over-the-counter items — but only if you have a prescription from a doctor. Over-the-counter pain relievers, allergy medicine, and cold medicine do not count unless prescribed.

What does not count: health insurance premiums, cosmetic procedures, gym memberships, vitamins without a prescription, and most dental work that is purely cosmetic. If you are unsure whether something qualifies, your FSA plan administrator (the company managing the account) can tell you before you spend the money.

How to use the money in your FSA

Most FSAs issue a debit card that works like a regular card at pharmacies, doctor offices, and medical suppliers. You swipe it, and the cost comes out of your FSA balance. Some plans require you to submit a reimbursement form instead — you pay out of pocket and then send a receipt to the plan administrator to get reimbursed. A few plans let you pay providers directly.

The debit card method is the fastest because you do not have to handle paperwork. However, some providers cannot accept FSA debit cards, so you may need to use the reimbursement form as a backup. Keep all receipts and explanation of benefits documents from your insurance company, because the plan administrator may ask for proof that the expense was medical and not already paid by insurance.

You can check your FSA balance online through your plan's website or app, usually the same portal where you enrolled. This helps you track how much you have left to spend before the year ends.

The "use it or lose it" rule and grace periods

Any money left in your FSA on December 31 goes back to your employer. You do not get it back, and you cannot roll it over to next year. This is the biggest difference between an FSA and an HSA, and it is why choosing the right contribution amount matters.

Some employers offer a grace period of up to 2.5 months into the new year (usually through March 15) during which you can still spend the previous year's FSA money. Not all employers offer this, so check your plan documents. A few employers also allow a small carryover — up to $610 in 2024, though this varies by year and employer — but this is less common.

Because of this rule, many people intentionally set aside a conservative amount or spend down their balance in December by stocking up on prescription refills or paying for planned medical procedures. Some also use FSA money for may be able to access items they were planning to buy anyway, like glasses or hearing aid batteries.

Who can open an FSA and what you need to know about leaving your job

You can only open an FSA through your employer — you cannot open one on your own. You must be enrolled in your employer's health plan to participate in the FSA. If your employer offers one, you can choose to enroll during open enrollment or when you first become may be able to access (usually when you are hired).

If you leave your job, your FSA ends. You cannot take the account with you or transfer it to a new employer's plan. Any money remaining in the account stays with your former employer. This is another reason to be careful about how much you contribute — if you think you might change jobs, a lower contribution is safer than a higher one.

If you have a major life change like losing your job, you may be able to continue FSA coverage through COBRA (a federal law that lets you keep workplace benefits for a limited time), but you have to pay the full cost yourself, including your employer's share. Many people find this expensive and choose to let the FSA end instead.

FSA vs. paying out of pocket: the tax savings

The main advantage of an FSA is the tax savings. If you set aside $2,500 in an FSA and you are in the 22% federal tax bracket, you save roughly $550 in federal income tax that year. You also avoid paying Social Security and Medicare taxes on that money, which adds another 7.65% in savings. The actual amount depends on your tax bracket and state taxes, but the savings are real and automatic.

The trade-off is the "use it or lose it" rule. If you set aside $2,500 and only spend $1,800, you lose $700. Whether an FSA makes sense depends on how predictable your medical spending is. If you have regular prescriptions, dental work, or vision care, an FSA usually saves money. If your medical costs are unpredictable or low, the risk of losing money may not be worth it.

Frequently Asked Questions

Can I change my FSA contribution amount during the year?

Only if you have a may have access to life event: marriage, divorce, birth of a child, loss of other health coverage, or significant change in your health care needs. Routine changes are only allowed during open enrollment. Contact your employer's benefits department to see if your situation qualifies.

What happens to my FSA money if I get fired or laid off?

Your FSA ends when ready. Any money remaining in the account is forfeited and goes back to your employer. You may have the option to continue coverage through COBRA, but you would pay the full cost yourself. Check with your employer about your specific situation.

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

No. The debit card is restricted to may be able to access medical expenses only. If you try to use it for non-medical items, the transaction will be declined. Some cards have safeguards that prevent misuse.

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

No penalty to you — the unused money straightforward goes back to your employer. However, this is why it is important to estimate carefully. Some employers offer a grace period or small carryover, so check your plan documents.

Can I use my FSA for my family members' medical expenses?

Yes, as long as they are claimed as dependents on your tax return. You can use FSA money for your spouse's and children's copays, prescriptions, and other may be able to access medical costs.