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 (FSA) is a benefit your employer may offer that works like this: you choose an amount to contribute each year, your employer deducts that money from your paychecks before taxes are calculated, and you use a debit card or submit receipts to pay for covered expenses. The money you contribute is not taxed, which means you pay less in federal income tax and payroll taxes. The tradeoff is that you must spend the money within the plan year or lose it — there is no rollover to next year (with rare exceptions).

FSAs come in two types: a medical FSA covers doctor visits, prescriptions, dental work, and other healthcare costs, while a dependent care FSA covers daycare, after-school programs, and adult day care for elderly relatives. You cannot have both types at the same time in the same year, though you can switch between them in future years. Your employer sets the rules for which expenses count, so the exact list varies by plan.

Key Takeaways

  • You choose your FSA contribution amount during your employer's open enrollment period, usually once per year, and the money comes out of your paychecks automatically.
  • FSA money is deducted before taxes, which lowers your taxable income and the amount you owe in federal and payroll taxes.
  • You can only use FSA funds for specific medical or dependent care expenses that your plan covers, not for general spending.
  • Money left unspent at the end of the plan year is forfeited — you cannot carry it over, so you must estimate carefully what you will actually spend.
  • You access the money through a debit card, or you pay out of pocket and submit receipts for reimbursement.

How the money flows from your paycheck to your account

During open enrollment — usually in the fall for a plan year starting January 1 — you tell your employer how much you want to contribute to your FSA. The amount can be anywhere from a few hundred dollars to a maximum set by the IRS, which changes each year. For 2024, the medical FSA limit is $3,200 and the dependent care FSA limit is $5,000 (these amounts vary by year).

Once you enroll, your employer divides your annual contribution by the number of pay periods and deducts that amount from each paycheck. The money goes into an account managed by a third-party administrator — often the same company that handles your health insurance claims. You do not see the money in your personal bank account; instead, you access it through the FSA system.

Because the money is deducted before your employer calculates federal income tax and Social Security tax, your taxable income drops. If you contribute $2,400 to a medical FSA, your W-2 will show $2,400 less in wages, which means you owe less in taxes. This is the main financial benefit of an FSA.

What expenses you can and cannot pay for

A medical FSA covers most healthcare costs that you would normally pay out of pocket: doctor visit copays, deductibles, prescriptions, dental work, vision care, hearing aids, and medical equipment like crutches or blood pressure monitors. It does not cover health insurance premiums, over-the-counter medications (with a few exceptions), or cosmetic procedures.

A dependent care FSA covers the cost of childcare while you work — daycare centers, nannies, after-school programs, and summer camps. It also covers adult day care for an elderly parent or disabled spouse if you need care so you can work. It does not cover school tuition, overnight camps, or babysitting for social events.

Your employer's plan document lists exactly which expenses are covered. If you are unsure whether something qualifies, ask your benefits administrator or the FSA administrator before you spend the money. Some items — like certain over-the-counter drugs — have changed in recent years, so do not assume last year's rules still explore.

How to actually use the money when you need it

Most FSA administrators issue a debit card that you can swipe at pharmacies, doctor offices, and other healthcare providers. The card is linked to your FSA account, and the purchase is deducted from your balance. Some providers will ask for a receipt or explanation of benefits to confirm the expense is FSA-may be able to access, especially for large purchases.

If your provider does not accept the FSA debit card, or if you prefer to pay with your own money, you can submit a claim for reimbursement. You pay the expense out of pocket, gather your receipt and explanation of benefits (if required), and submit them to the FSA administrator through their website or mobile app. Reimbursement usually arrives within one to two weeks.

Keep all receipts and documentation. The FSA administrator may ask you to prove that an expense was actually incurred and that it qualifies under the plan. If you cannot provide proof, the reimbursement can be denied, and you lose that money.

The use-it-or-lose-it rule and how to plan around it

Any FSA money you do not spend by the end of the plan year is forfeited. If your plan year ends December 31 and you have $400 left in your account on January 1, that $400 is gone — your employer keeps it. This is why FSAs require careful planning: you must estimate what you will actually spend, not what you might spend.

There are two limited exceptions. Some employers offer a grace period of up to two and a half months after the plan year ends, during which you can still submit claims for expenses incurred in the prior year. A few employers allow a carryover of up to $610 (in 2024) to the next year, but this is rare and only if the plan specifically includes it. Check your plan documents to see if either applies to you.

Because of this rule, many people contribute less than they could. If you are unsure what you will spend, start with a conservative number — perhaps $1,000 or $1,500 — and increase it in future years once you have a sense of your actual costs. It is better to leave some money on the table than to lose a large amount.

When you can enroll and make changes

You can enroll in an FSA only during your employer's open enrollment period, which is usually once per year in the fall. If you miss that window, you cannot enroll until the next year, unless you have a may have access to life event.

A may have access to life event — such as the birth of a child, marriage, divorce, loss of health insurance, or a significant change in dependent care costs — allows you to enroll or change your contribution mid-year. You typically have 30 to 60 days after the event to make the change. Your employer's benefits team can tell you whether your situation qualifies.

If you enroll mid-year, your contribution is usually prorated based on how many pay periods remain in the plan year. For example, if you enroll in July for a plan year ending December 31, you would contribute for about six months of pay periods instead of twelve.

How FSAs compare to Health Savings Accounts and other options

An FSA and a Health Savings Account (HSA) are both tax-advantaged ways to pay for healthcare, but they work differently. An FSA is offered by your employer and has the use-it-or-lose-it rule. An HSA is paired with a high-deductible health plan, has no use-it-or-lose-it rule, and the money rolls over year to year. If your employer offers both, an HSA is usually the better choice because you do not lose unused money.

Some employers offer a Health Reimbursement Arrangement (HRA) instead of or alongside an FSA. An HRA is funded entirely by the employer, not by your contributions, and unused money typically rolls over. The rules vary widely by employer.

If your employer does not offer an FSA, you have no other way to set aside pre-tax money for medical expenses (unless you have access to an HSA). You would pay for healthcare costs with after-tax dollars, which means you pay full taxes on that income.

Common mistakes to avoid

The biggest mistake is overestimating how much you will spend and losing money at year-end. Many people contribute the maximum amount without thinking through their actual expenses, then scramble in December to spend the remaining balance on items they do not need. Start conservatively and increase your contribution in future years.

Another mistake is assuming something is covered without checking your plan document first. Over-the-counter medications, for example, have specific rules that change year to year. Sunscreen, vitamins, and pain relievers may or may not be covered depending on your plan. Ask before you buy.

A third mistake is not keeping receipts. If the FSA administrator asks for proof of an expense and you cannot provide it, you will not be reimbursed. Keep receipts for at least three to five years in case of an audit.

Frequently Asked Questions

What happens to my FSA money if I leave my job?

You lose access to the money when ready. FSA accounts are tied to your employer, not to you personally. If you leave mid-year, you forfeit any unused balance. Some employers allow you to continue submitting claims for expenses incurred before you left, but only within a short window. Check with your former employer's benefits team.

Can I use my FSA debit card at the grocery store to buy over-the-counter medicine?

It depends on the store and the product. Some grocery stores and pharmacies have systems that flag FSA cards and only allow them for may be able to access items. Others do not have that system, so the card may be declined or you may be able to use it for anything. The safest approach is to use your FSA card at pharmacies and medical providers where the staff know which items may have access to.

Can my spouse and I both have FSAs?

Yes, if you both work for employers that offer FSAs. You can each enroll in your own employer's plan. However, the combined amount you contribute to dependent care FSAs cannot exceed the IRS limit (currently $5,000 per household per year), so you need to coordinate with your spouse to stay under that cap.

What if I have a medical FSA and I do not spend all the money by the important date?

The unused money is forfeited unless your employer offers a grace period or carryover. Some employers allow you to submit claims for up to two and a half months after the plan year ends for expenses incurred in the prior year. A few allow you to carry over up to $610 to the next year. Check your plan documents or ask your benefits administrator which applies to you.

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 dependent care costs. Outside of those events, you are locked into your contribution for the entire plan year. This is why it is important to estimate carefully during open enrollment.