An FSA lets you set aside pre-tax money from your paycheck to pay for medical costs that your insurance doesn't cover

A Flexible Spending Account (FSA) is a workplace benefit that works like this: you decide how much money to set aside from your paycheck before taxes are taken out, your employer holds that money in an account, and you use it to pay for may be able to access medical expenses throughout the year. The money you put in reduces your taxable income, which means you pay less in federal income tax and Social Security tax. You don't get the money back as a refund — you spend it on medical bills, and the tax savings are your benefit.

The catch is that FSAs operate on a "use it or lose it" rule in most cases. Money you don't spend by the end of the plan year (usually December 31) goes back to your employer. Some employers offer a grace period of up to 2.5 months into the next year, or a carryover of up to $610 (the amount changes yearly), but you need to check your specific plan. This is why FSAs work best if you can predict your medical spending fairly accurately.

Key Takeaways

  • You contribute pre-tax dollars through payroll deduction, which lowers your federal income tax and Social Security tax for the year.
  • You can use FSA money to pay for may be able to access medical, dental, and vision expenses that insurance doesn't cover, including copays, deductibles, and over-the-counter items like pain relievers and bandages.
  • Money left unspent at the end of the plan year is forfeited unless your employer offers a grace period or carryover option.
  • You enroll in an FSA during your employer's open enrollment period, usually once per year, and you cannot change your contribution amount mid-year unless you have a may have access to life event.

How you contribute money and when you can change your election

You enroll in an FSA during your employer's open enrollment period, which typically happens once a year in the fall for a plan year starting January 1. You decide on a dollar amount to contribute — for 2024, the maximum is $3,300 per year, though this limit changes annually. That amount is divided by the number of pay periods and deducted from your paycheck before taxes are calculated.

Once you make your election, you're locked in for the entire plan year. You cannot increase or decrease your contribution unless you experience a may have access to life event, such as a marriage, divorce, birth of a child, loss of health insurance, or a significant change in your spouse's benefits. Your employer's benefits administrator determines what counts as may have access to, so the rules vary by company. If you want to change your contribution for the next plan year, you wait for the next open enrollment period.

What expenses you can and cannot pay with FSA funds

FSA money covers a broad range of medical, dental, and vision expenses, but only those that are not reimbursed by your insurance. may be able to access expenses include copays and coinsurance, deductibles, prescription medications, dental work (fillings, cleanings, orthodontics), eyeglasses and contact lenses, hearing aids, and certain over-the-counter items like pain relievers, allergy medicine, and first-aid supplies. You can also use FSA funds for mental health counseling, physical therapy, and medical equipment like crutches or blood pressure monitors.

Expenses that do not may have access to include cosmetic procedures, gym memberships, vitamins (unless prescribed by a doctor), and most over-the-counter items that treat general wellness rather than a specific condition. Health insurance premiums themselves are not may be able to access, nor are expenses covered by your insurance plan. If your insurance covers a service, you cannot use FSA money to pay for it — the FSA is meant to cover out-of-pocket costs only.

How you access and spend the money

Your employer typically provides an FSA debit card that you can use at pharmacies, doctors' offices, and other medical providers. When you swipe the card, the amount is deducted from your FSA balance. Some providers may ask you to submit a receipt or explanation of benefits to confirm the expense is may be able to access; this is called substantiation, and it protects both you and the plan from misuse.

If you don't have a debit card or prefer not to use one, you can pay out of pocket and then submit a claim for reimbursement. You'll need to fill out a claim form (usually available through your employer's benefits portal) and attach a receipt or itemized bill showing the date, provider, and amount. Reimbursement typically takes one to two weeks. Keep all receipts for at least three years in case your employer's plan administrator audits your account.

The tax savings you actually receive

The main benefit of an FSA is the tax savings. If you contribute $2,500 to an FSA, that $2,500 is subtracted from your gross income before federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) are calculated. For someone in the 22% federal tax bracket, a $2,500 FSA contribution saves roughly $550 in taxes ($2,500 × 0.22). Add in the 7.65% in Social Security and Medicare taxes, and your total savings could be around $750 on that $2,500 contribution.

This is not a refund or a rebate — it's a reduction in the taxes you owe. The trade-off is that you must spend the money on may be able to access expenses, and any balance left over at year-end is forfeited. This is why overestimating your medical spending can cost you more than you save in taxes.

The "use it or lose it" rule and how to avoid losing money

At the end of the plan year, any money remaining in your FSA account is forfeited and returned to your employer. This rule exists because FSAs are funded with pre-tax dollars, and tax law prevents you from getting that money back as a refund. However, your employer may offer one or both of these options to soften the impact: a grace period (usually 2.5 months into the next year to spend remaining funds) or a carryover (allowing you to roll up to $610 of unused funds into the next plan year).

To avoid losing money, estimate your medical spending conservatively. Review your past year's receipts, factor in any planned procedures or dental work, and add a small buffer for unexpected costs like urgent care visits. If you're unsure, contribute less rather than more — you can always increase your contribution next year during open enrollment. Some employers also allow you to check your FSA balance online throughout the year, which helps you track spending and adjust your habits if needed.

How an FSA differs from an HSA and a dependent care FSA

An HSA (Health Savings Account) is similar to an FSA but has key differences. An HSA is only available if you're enrolled in a high-deductible health plan, there is no "use it or lose it" rule (unused money rolls over indefinitely), and you can invest the money like a retirement account. However, HSAs have lower annual contribution limits ($4,150 for individual coverage in 2024) and are less common through employers. An FSA has higher contribution limits, requires no specific insurance plan, and is more widely offered.

A dependent care FSA is a separate account (not a medical FSA) used to pay for childcare or adult dependent care expenses. It has its own contribution limit (currently $5,000 per year for married couples filing jointly) and the same "use it or lose it" rule. You cannot use dependent care FSA money for medical expenses, and you cannot use a medical FSA for childcare. Some employers offer both types of accounts, and you can contribute to each one in the same year.

Frequently Asked Questions

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

You forfeit any unused FSA balance when you leave your employer. The money does not follow you to a new job or convert to another account type. If you're changing jobs, try to spend down your FSA balance before your last day, or check whether your new employer offers an FSA so you can enroll during their open enrollment period.

Can I use my FSA for my spouse or children?

Yes. You can use FSA funds to pay for may be able to access medical expenses for yourself, your spouse, and your dependents (including adult children if they may have access to as dependents on your tax return). The money doesn't have to be spent on the person who is enrolled in the plan.

What if I submit a claim and it's denied?

Your employer's plan administrator will send you a written explanation of why the expense is ineligible. Common reasons include the expense being covered by insurance, the item not being on the IRS-approved list, or missing documentation. You can appeal the decision or resubmit with additional information if you believe the denial was incorrect.

Can I change my FSA contribution if my income changes mid-year?

No, unless the income change is tied to a may have access to life event (such as a spouse losing a job). A straightforward change in your salary or hours does not may have access to. You can only adjust your contribution during open enrollment or if your employer allows changes in response to specific life events.

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

There is no penalty to you personally — you straightforward lose the unspent balance. However, if you consistently overestimate and forfeit money, you're essentially paying taxes on that amount and then losing it, which defeats the purpose of the FSA. The best approach is to contribute conservatively and increase your amount gradually as you learn your actual spending patterns.