A Flexible Spending Account lets you set aside pre-tax money from your paycheck to pay for medical expenses your insurance doesn't cover

A Flexible Spending Account (FSA) is an employer-sponsored plan where you contribute money before taxes are taken out, then use that money to pay for may have access to medical costs. The money comes directly from your paycheck, which lowers your taxable income for the year. You decide how much to contribute during your employer's open enrollment period, and that amount is set aside in a separate account.

The main advantage is the tax savings. If you contribute $2,500 to an FSA and your tax rate is 25 percent, you save roughly $625 in federal taxes that year. You only pay taxes on what's left after your FSA contribution. The catch is that FSAs have strict rules about what you can spend the money on, and you generally lose any money you don't use by the end of the plan year.

Key Takeaways

  • FSA contributions come from your paycheck before taxes, which reduces the income you owe taxes on.
  • You can only use FSA money for specific medical expenses: copays, deductibles, prescriptions, dental work, vision care, and some over-the-counter items with a doctor's note.
  • Most FSAs operate on a "use it or lose it" basis, meaning unspent money at the end of the year goes back to your employer, though some plans offer a grace period or carryover of up to $610.
  • You must enroll during your employer's open enrollment window, usually once a year, and you cannot change your contribution amount unless you have a may have access to life event.
  • FSAs are separate from health insurance and work alongside whatever plan your employer offers.

What medical expenses you can actually pay for with FSA money

The IRS maintains a list of may have access to medical expenses that FSA funds can cover. These include copays and coinsurance for doctor visits, deductibles, prescription medications, dental work (fillings, cleanings, orthodontia), vision care (glasses, contacts, exams), and hearing aids. You can also use FSA money for some over-the-counter items, but only if you have a doctor's note or prescription—this includes pain relievers, allergy medicine, and antacids.

What you cannot use FSA money for is just as important. Cosmetic procedures, gym memberships, vitamins without a medical reason, and most wellness products are off-limits. If you use FSA funds for a non-may have access to expense, you owe taxes on that amount plus a 20 percent penalty. Keep your receipts and explanation of benefits documents—your FSA administrator may ask for proof that an expense was medical.

How much you can contribute and when you choose

Your employer sets the contribution limits within IRS rules. For 2024, the maximum is $3,200 per year, though this amount changes annually. You decide your contribution amount during open enrollment, which is usually once a year in the fall or winter. The money is divided evenly across your paychecks for the rest of the plan year.

You cannot change your contribution mid-year unless you have a may have access to life event: marriage, divorce, birth or adoption of a child, loss of other health coverage, or a significant change in your employer's plan. A job change or change in income alone does not may have access to. If your circumstances change, you typically have 30 to 60 days to notify your employer and adjust your FSA contribution.

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

Most FSAs operate under a "use it or lose it" rule: any money you don't spend by the end of the plan year goes back to your employer. You do not get a refund. This is the biggest drawback to FSAs and why you need to estimate carefully how much you will actually spend on medical costs.

Some employers offer a grace period of up to 2.5 months into the next year to spend remaining FSA funds, or a carryover of up to $610 (for 2024) into the next plan year. Ask your employer's benefits team whether your plan includes either option. If it does, you have more flexibility to spend down your account without losing money. If not, contribute conservatively—it is better to leave money in your pocket than to forfeit it.

How to access your FSA money when you need it

Your employer provides you with an FSA debit card or a claims process to access your funds. With a debit card, you swipe it at the pharmacy, doctor's office, or dental clinic just like a regular card, and the cost is deducted from your FSA balance. Some FSAs require you to submit a claim form with receipts instead, which takes longer but gives you more control over what gets paid.

You can also pay out of pocket and then request reimbursement from your FSA administrator. This is useful if you do not have the debit card with you or if the provider does not accept it. Keep all receipts and explanation of benefits statements. Your FSA administrator may ask for documentation to verify that the expense was may have access to, and you need proof to back up your claim.

FSA versus HSA: which one you might have access to

FSAs and HSAs are different accounts with different rules. An FSA is offered by your employer and is "use it or lose it." An HSA is a savings account you own, and unused money rolls over year to year. You can only open an HSA if you are enrolled in a high-deductible health plan (HDHP), but not all employers offer HDHPs. You can have an FSA and an HSA at the same time only if your FSA is a limited-purpose FSA that covers only dental and vision expenses.

If your employer offers both a regular FSA and an HDHP with an HSA option, you have to choose one or the other. An HSA is usually the better long-term choice because the money is yours to keep, but an FSA makes sense if you have predictable medical expenses coming up in the next year and you want the when ready tax savings.

What to do if you change jobs or lose employer coverage

If you leave your job, your FSA coverage typically ends on your last day of employment. You do not lose the money you have already contributed—you can still submit claims for expenses you incurred while you were covered. However, you cannot make new contributions or use the account after your coverage ends.

If you move to a new job with a different employer, that employer may offer its own FSA, but it is a separate account with a separate contribution limit and plan year. Your old FSA balance does not transfer. If your new employer does not offer an FSA, you lose access to any remaining balance in your old account. This is another reason to spend down your FSA before you leave a job or to contribute conservatively if you think a job change is coming.

Frequently Asked Questions

Can I use my FSA debit card to buy anything at a pharmacy?

No. The debit card is restricted to may have access to medical expenses. If you try to buy non-medical items like shampoo or snacks, the transaction will be declined. Some pharmacies may ask you to verify that the item is medical before processing the card.

What happens if I contribute too much and don't spend it all?

The unspent money goes back to your employer unless your plan offers a grace period or carryover. You cannot get it back as a refund. This is why it is important to estimate conservatively and only contribute what you are confident you will spend on may have access to medical expenses.

Can I change my FSA contribution if my medical needs change during the year?

Only if you have a may have access to life event like a birth, marriage, or loss of other coverage. A change in your health or medical needs alone does not allow you to adjust your contribution mid-year. You can change your amount during the next open enrollment period.

Do I need a prescription to buy over-the-counter medicine with my FSA?

For most over-the-counter items, yes—you need a doctor's note or prescription to use FSA funds. This applies to pain relievers, allergy medicine, and antacids. Feminine hygiene products are an exception and do not require a prescription.

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

Yes, as long as they are covered under your health insurance plan or you claim them as dependents on your taxes. You can use FSA funds for any family member's may have access to medical expenses, not just your own.