How a Flexible Spending Plan Works

A Flexible Spending Account (FSA) is an employer-sponsored account where you set aside pre-tax money to pay for may be able to access medical and dependent care expenses. You decide how much to contribute each year, your employer deducts that amount from your paychecks before taxes are calculated, and you reimburse yourself from the account when you pay for covered services. The money you contribute reduces your taxable income, which lowers the taxes you owe that year.

The account operates on a calendar-year cycle: you choose your contribution amount during your employer's open enrollment period (usually in the fall), the money is deducted from each paycheck throughout the following year, and you must spend what remains by December 31 or lose it. Unlike a savings account, an FSA is designed to be spent down annually — there is no rollover of unused funds to the next year, with rare exceptions.

You access the money through a debit card issued by your plan administrator, by submitting receipts for reimbursement, or by paying out of pocket and requesting reimbursement later. The account covers specific categories of expenses: medical care (copays, deductibles, prescriptions, dental, vision), dependent care (daycare, after-school programs, summer camps), or both, depending on which type of FSA your employer offers.

Key Takeaways

  • You contribute a set amount each year during open enrollment, and your employer deducts it from your paychecks before taxes are withheld.
  • The money can only be used for specific may be able to access expenses in medical care, dependent care, or both, depending on your plan type.
  • You must spend the full balance by December 31 each year, or the remaining money is forfeited — there is no carryover except in limited circumstances.
  • You access funds through a debit card, direct reimbursement from the plan, or by submitting receipts after you pay out of pocket.
  • Contribution limits are set by the IRS and change annually; for 2024, the medical FSA limit is $3,200 and the dependent care FSA limit is $5,000 per household.

Contribution Limits and How Much to Set Aside

The IRS sets a maximum contribution limit each year. For 2024, you can contribute up to $3,200 to a medical FSA or up to $5,000 to a dependent care FSA. These limits change annually, and your employer will tell you the current year's limit during open enrollment. You choose the exact amount you want to contribute within that limit — there is no minimum, and you do not have to contribute at all.

The challenge is deciding how much to set aside. You need to estimate your out-of-pocket medical or dependent care expenses for the coming year. If you choose $2,000 but only spend $1,500, you lose the $500. If you choose $1,500 but need $2,000, you pay the extra $500 out of pocket with after-tax dollars. Many people base their estimate on what they spent the previous year, then adjust for known changes — a new child starting daycare, a planned surgery, or a change in insurance coverage.

If you have a may have access to life event during the year (birth of a child, change in dependent care needs, loss of coverage), you may be able to change your contribution amount outside of open enrollment. Your employer's benefits department can tell you which events allow a mid-year change.

may be able to access Expenses You Can Pay For

A medical FSA covers most out-of-pocket health care costs: copays and coinsurance, deductibles, prescription medications, dental work, vision care (including glasses and contact lenses), and medical equipment like crutches or blood glucose monitors. It does not cover health insurance premiums, over-the-counter medications (unless prescribed by a doctor), or cosmetic procedures.

A dependent care FSA covers the cost of care for children under age 13 or disabled dependents while you work: daycare centers, in-home nannies, after-school programs, summer day camps, and adult day care for an elderly parent. It does not cover overnight camps, tuition for school or preschool (even if the school provides care), or babysitting for social outings.

Your plan documents list the full set of covered expenses. If you are unsure whether a specific cost qualifies, ask your plan administrator before you pay — they can give you a definitive answer and often provide a written confirmation you can keep with your receipt.

How to Access Your Money

Most employers issue a debit card linked to your FSA. You use it like a regular debit card at pharmacies, doctors' offices, and other providers. The card is tied to your account, so the payment is deducted directly from your FSA balance. Some providers may ask you to show proof that the expense is may be able to access — keep your receipt in case they do.

If your plan does not issue a debit card, or if you prefer to pay out of pocket, you can submit a claim for reimbursement. You pay the provider with your personal money, then send a receipt and a claim form to your plan administrator. They review it, confirm the expense is covered, and send you a reimbursement check or direct deposit. This process usually takes one to two weeks.

You can also request reimbursement for expenses you paid for months earlier in the year, as long as you have the receipt and the expense was incurred while you were enrolled in the plan. Some people use this strategy to reimburse themselves from their FSA near the end of the year if they have not spent their full balance.

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

Any money left in your FSA on December 31 is forfeited — you cannot carry it over to the next year. This is called the use-it-or-lose-it rule, and it applies to nearly all FSAs. If you contributed $2,500 and spent only $2,000, the remaining $500 is gone. This is why choosing the right contribution amount matters: contributing too much costs you money.

There are two limited exceptions. Some employers offer a grace period of up to 2.5 months into the new year (usually through March 15) during which you can spend down the previous year's balance. A few employers offer a carryover of up to $610 (in 2024) to the next year, though this is less common. Ask your employer whether your plan includes either option — if it does, you have more flexibility in your contribution choice.

The important date to submit reimbursement claims for the previous year is usually 60 to 90 days after the plan year ends. Check your plan documents for the exact date. If you miss the important date, you cannot recover the money even if you have receipts.

Tax Savings and How Much You Actually Save

The main benefit of an FSA is the tax savings. Because you contribute with pre-tax dollars, you do not pay federal income tax, Social Security tax, or Medicare tax on that money. If you are in the 22% federal tax bracket and contribute $2,000, you save roughly $440 in federal taxes alone. Add state and local taxes, and your savings can be 25% to 40% of your contribution.

This is why an FSA can be worth using even if you are uncertain about your expenses. If you contribute $1,500 and spend only $1,200, you lose $300 — but you saved $330 to $600 in taxes on that $1,500. You still come out ahead. The risk is overestimating: if you contribute $3,000 and spend only $1,500, you lose $1,500, which may outweigh your tax savings.

Your employer also saves money when you contribute to an FSA, because they do not pay payroll taxes on your contribution. Some employers pass part of this savings back to employees through lower premiums or employer contributions to the FSA, though this varies.

Frequently Asked Questions

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

You lose access to the account when ready. Any remaining balance is forfeited, even if you have receipts for expenses you have not yet submitted. You may be able to continue coverage through COBRA, which would let you keep the FSA and spend down the balance, but you would pay the full premium yourself. Check with your employer's benefits department about COBRA may be able to access before you leave.

Can I use my FSA debit card at any store?

No. The card only works at pharmacies, doctors' offices, dental offices, vision providers, and other medical or dependent care vendors. It will be declined at grocery stores or general retailers, even if you are buying may be able to access items like over-the-counter pain relievers. Some pharmacies may allow you to use the card only for pharmacy purchases, not general merchandise.

Can I change my FSA contribution amount during the year?

Only if you have a may have access to life event: birth or adoption of a child, change in dependent care costs, loss of health coverage, marriage or divorce, or significant change in your spouse's benefits. You must request the change within 30 to 60 days of the event. Routine changes are only allowed during open enrollment.

Do I need to keep receipts for FSA purchases?

Yes. Keep receipts for all FSA expenses, even if you use the debit card. Your plan administrator may ask for proof that an expense is may be able to access, and you will need the receipt to show what you purchased and when. Store receipts in a folder or take photos of them for your records.

What if I do not spend my full FSA balance by the important date?

The remaining money is forfeited unless your plan offers a grace period or carryover. Some plans let you spend down the previous year's balance through mid-March of the new year. If your plan does not offer this option, you lose the money. This is why estimating conservatively — choosing a lower contribution amount — is often safer than overestimating.