What a Flexible Spending Account Does

A Flexible Spending Account (FSA) is a workplace benefit that lets you set aside pre-tax money from your paycheck to pay for medical and dependent care expenses. The money comes out before income tax is calculated, 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 divided across your paychecks for the year.

The key difference between an FSA and regular health insurance is that an FSA is specifically for out-of-pocket costs — copays, deductibles, prescriptions, dental work, vision care, and similar expenses. You do not use it to pay your insurance premium. The money sits in an account that you access throughout the year as you incur may be able to access expenses.

Key Takeaways

  • You contribute pre-tax money to your FSA during open enrollment, and the amount is deducted from each paycheck across the year.
  • FSA funds cover copays, deductibles, prescriptions, dental, vision, and other out-of-pocket medical costs, but not insurance premiums.
  • You access your FSA money through a debit card, reimbursement request, or direct payment to providers, depending on your plan.
  • Money left in your FSA at the end of the year is forfeited — you cannot roll it over to the next year, so you should estimate carefully what you will spend.
  • You can only change your FSA contribution during open enrollment or after a may have access to life event like marriage, birth, or job loss.

How Much You Can Contribute and When

Your employer sets the contribution limit for FSAs, but the IRS caps the amount at a maximum each year. The limit changes annually and varies depending on whether you have a dependent care FSA, a medical FSA, or both. You choose your contribution amount during your employer's open enrollment period, which typically happens once a year in the fall for benefits starting January 1.

Once you elect an amount, you are locked into that contribution for the entire year. You cannot increase or decrease it unless you experience 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 dependent care costs. Your employer's benefits department can tell you which events may have access to and what documentation you need to submit.

What Expenses Your FSA Covers

FSAs cover a wide range of medical and dependent care costs. Medical FSAs pay for copays, coinsurance, deductibles, prescription medications, dental work, vision care (including glasses and contacts), hearing aids, and many other out-of-pocket health expenses. The IRS maintains a detailed list of may be able to access expenses, and your plan documents will specify which ones your employer's FSA covers.

Dependent care FSAs are separate and cover costs for childcare, preschool, adult day care, and summer camps — but only for dependents you claim on your taxes. They do not cover education expenses like K–12 tuition or college. If your employer offers both types, you can contribute to each one, but they have separate limits and separate use-it-or-lose-it rules.

Common expenses that do not may have access to include health insurance premiums, over-the-counter medications (unless prescribed by a doctor), cosmetic procedures, gym memberships, and vitamins. If you are unsure whether something qualifies, ask your plan administrator before you spend the money.

How You Access and Use Your FSA Money

Most employers provide an FSA debit card that works like a regular debit card at pharmacies, doctors' offices, and other medical providers. You swipe it at checkout, and the cost is deducted from your FSA balance. Some plans require you to submit a receipt or explanation of benefits afterward to confirm the expense was may be able to access.

If your employer does not provide a debit card, you pay out of pocket and then request reimbursement. You submit receipts and an itemized list to your plan administrator, and they send you a check or direct deposit within a few weeks. Keep all receipts and documentation — your plan may ask for proof that expenses were actually incurred and may be able to access.

A few employers allow you to submit claims online through a benefits portal, where you upload receipts and track your balance in real time. Check with your benefits department about how your specific plan works and what documentation you need to keep.

The Use-It-or-Lose-It Rule and Carryover Options

Money left in your FSA at the end of the calendar year is forfeited — you lose it. This is the most important rule to understand when deciding how much to contribute. If you contribute $2,500 and only spend $1,800, the remaining $700 disappears. You cannot roll it over to next year, and you cannot get it back as a refund.

Some employers offer a grace period of up to 2.5 months into the next year to spend down your remaining balance, which gives you a little extra time. A few employers also allow you to carry over up to $610 (the amount changes yearly) into the next year, but this is less common. Check your plan documents or ask your benefits department whether either option is available to you.

Because of this rule, estimate conservatively. Look at your medical and dependent care spending from the past year, account for any changes you expect, and contribute an amount you are confident you will use. It is better to leave some money on the table than to forfeit a large balance.

How FSA Contributions Affect Your Taxes

The main tax benefit of an FSA is that your contributions are deducted from your paycheck before income tax is calculated. If you contribute $2,400 to an FSA and earn $50,000 a year, you only pay income tax on $47,600. This lowers your federal income tax bill for the year.

Your FSA contributions are also exempt from Social Security and Medicare taxes (FICA), which saves you an additional 7.65 percent on the amount you contribute. Over the course of a year, these savings can be substantial, especially if you have significant medical or dependent care expenses.

However, the tax savings mean you will have a lower taxable income, which can affect other tax credits or deductions you claim. If you are close to income thresholds for programs like the Earned Income Tax Credit, contributing to an FSA might change your outcome. Talk to a tax professional if you are unsure how an FSA will affect your specific tax situation.

What Happens When You Leave Your Job

If you leave your job during the year, you generally lose access to your FSA when ready, even if you have contributed money that you have not yet spent. Some employers allow you to continue using your FSA through the end of the calendar year, but this is not required. Check with your employer's benefits department about their specific policy.

When you leave, you may be able to continue your health insurance through COBRA, but your FSA does not continue under COBRA. You cannot transfer your FSA balance to a new employer's plan. Any money remaining in your account is forfeited, so try to spend it before your last day if possible.

If you are switching jobs, ask your new employer whether they offer an FSA and when you can enroll. You may be able to start a new FSA at your new job, but you will need to wait for their open enrollment period unless you have a may have access to life event.

Frequently Asked Questions

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 and dependent care expenses only. If you try to use it for ineligible items, the transaction will be declined. Some retailers may ask for a receipt to verify the purchase was may be able to access before processing the payment.

What happens if I spend more than my FSA balance?

You cannot spend more than you have contributed. Once your balance is zero, your debit card will be declined. You will need to pay out of pocket for any additional expenses. This is why estimating your contribution carefully is important.

Can I change my FSA contribution mid-year?

Only if you have a may have access to life event like marriage, birth, adoption, divorce, loss of health coverage, or a significant change in dependent care costs. You cannot change your contribution just because you want to. Your employer's benefits department can tell you what counts as a may have access to event and what paperwork you need to submit.

Do I need to submit receipts every time I use my FSA debit card?

It depends on your plan. Some plans require receipts for every transaction, while others only ask for them randomly or when the expense seems unusual. Keep all receipts and documentation for at least three years in case your plan asks for proof later.

Can my spouse and I both have FSAs?

Yes, if you both work for employers that offer FSAs. You each have your own account and your own contribution limit. However, you cannot both claim the same dependent care expense — only one of you can use FSA money to pay for the same childcare cost.