What Flexible Spending Actually Does

A Flexible Spending Account (FSA) lets you set aside money from your paycheck before taxes are taken out, then use that money to pay for medical expenses your health insurance doesn't cover. The money you put in reduces your taxable income for the year, which means you pay less in federal income tax and Social Security tax.

The trade-off is strict: you choose an amount at the start of the year, you can only change it if your life circumstances change (marriage, birth of a child, loss of coverage), and any money you don't spend by the end of the year is forfeited. This is called the "use-it-or-lose-it" rule, and it's the most important thing to understand before you open an FSA.

Your employer sets up the FSA through a third-party administrator — companies like WageWorks, Conduent, or Fidelity Investments manage the accounts. You don't open it yourself; it's offered as part of your workplace benefits package during open enrollment.

Key Takeaways

  • Money you put into an FSA comes out of your paycheck before income tax and payroll tax, lowering your total tax bill for the year.
  • You can only spend FSA money on medical expenses that your health insurance plan doesn't cover, such as copays, deductibles, prescription costs, and certain over-the-counter items.
  • You must choose your FSA contribution amount during your employer's open enrollment period, and you cannot change it unless you have a may have access to life event like marriage or the birth of a child.
  • Any FSA money you don't spend by December 31 is forfeited — you cannot roll it over to the next year or get it back as a refund.
  • You access your FSA funds through a debit card, reimbursement request, or direct payment to providers, depending on how your employer's plan is set up.

How Much You Can Contribute Each Year

Your employer decides whether to offer an FSA and sets the rules for how much you can contribute. The IRS sets a maximum limit each year — for 2024, the limit is $3,300 per person. Your employer may set a lower limit, but cannot allow you to contribute more than the IRS maximum.

The contribution amount is divided evenly across your paychecks for the year. If you contribute $2,400 and get paid 24 times per year, $100 comes out of each paycheck before taxes. This means you save money on taxes when ready — the exact amount depends on your tax bracket and whether you pay state income tax, but most people save 20 to 40 percent on the money they contribute.

You choose your contribution amount during open enrollment, which typically happens once per year in the fall. If you don't contribute during open enrollment, you cannot open an FSA until the next year's enrollment period arrives.

What Medical Expenses You Can Pay For

FSA money can only be used for may have access to medical expenses — costs related to diagnosis, treatment, or prevention of disease. Your health insurance plan does not have to cover these expenses for them to may have access to; what matters is whether they are medical in nature.

Common may have access to expenses include copays and coinsurance, deductibles, prescription medications, dental work (fillings, crowns, orthodontia), vision care (glasses, contacts, eye exams), hearing aids, mental health counseling, and physical therapy. Over-the-counter medications like pain relievers and allergy medicine now may have access to if you have a prescription or a doctor's note, though this changed in 2020.

Expenses that do not may have access to include cosmetic procedures, gym memberships, vitamins (unless prescribed by a doctor for a specific condition), and most toiletries. If you are unsure whether an expense qualifies, your FSA administrator's website usually has a searchable database, or you can call and ask before you spend the money.

How You Access and Spend Your FSA Money

Most employers offer an FSA debit card that works like a regular debit card at pharmacies, doctor's offices, and other medical providers. You swipe it at checkout, and the money comes out of your FSA account. Some providers require you to submit a receipt or proof of the expense before they will process the charge.

If your employer does not provide a debit card, you pay out of pocket and then request reimbursement from your FSA administrator. You submit a claim form along with a receipt or explanation of benefits from your provider, and the administrator sends you a check or direct deposit within one to two weeks. This method takes longer but works the same way.

A few employers allow you to pay providers directly — the provider bills your FSA account instead of you. This is less common but eliminates the need for you to handle the money yourself.

The Use-It-or-Lose-It Rule and Grace Periods

Any FSA money remaining in your account on December 31 is forfeited. You cannot carry it over to the next year, and you cannot withdraw it as cash. This is a federal rule that applies to all FSAs, regardless of your employer.

Some employers offer a grace period — usually 2.5 months into the next year — during which you can spend the previous year's remaining FSA balance. If your employer offers a grace period, you can use 2024 money through mid-March 2025. Not all employers offer this, so check your plan documents or ask your benefits administrator whether yours does.

Because of this rule, it's important to estimate conservatively. If you contribute too much and cannot spend it all, you lose the money. If you contribute too little, you cannot add more until the next open enrollment period.

When You Can Change Your FSA Contribution

Once you choose your FSA contribution amount during open enrollment, you are locked in for the entire year. You cannot increase or decrease it unless you have a may have access to life event.

may have access to events include marriage, divorce, birth or adoption of a child, death of a spouse or dependent, loss of health coverage, significant change in your spouse's benefits, and a few others. When a may have access to event occurs, you typically have 30 to 60 days to contact your benefits administrator and make changes. You must provide documentation — a marriage certificate, birth certificate, divorce decree, or letter from your other employer, depending on the event.

Open enrollment itself is not a may have access to event. You cannot wait until open enrollment to change your FSA contribution unless your circumstances have actually changed. If you want to contribute a different amount next year, you can do that during the next open enrollment period without needing a may have access to event.

FSA vs. Health Savings Account: Key Differences

An FSA and a Health Savings Account (HSA) both let you set aside pre-tax money for medical expenses, but they work differently. An FSA is "use-it-or-lose-it" — money left over at the end of the year is gone. An HSA rolls over year to year and can be invested, so the money can grow and stay in the account indefinitely.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). An FSA works with any health insurance plan. HSAs have higher contribution limits than FSAs. An FSA is offered through your employer; an HSA can be opened through your employer or on your own.

Some employers offer both an FSA and an HSA, but you cannot contribute to both in the same year. If your employer offers an HSA and you are may be able to access, you may want to choose the HSA instead of an FSA because the money does not disappear at year-end. If your employer only offers an FSA, or if you are not may be able to access for an HSA, an FSA is still a useful way to reduce your taxes on medical spending.

Frequently Asked Questions

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

You forfeit any remaining FSA balance when you leave your employer. The money does not transfer to a new job or a personal account. You can continue to spend money you contributed before you left through the end of the calendar year (or through the grace period if your plan had one), but once the year ends, any unspent balance is gone. This is another reason to contribute conservatively.

Can I use my FSA debit card for anything other than medical expenses?

No. The FSA debit card is restricted to may have access to medical expenses only. If you try to use it for non-medical purchases, the transaction will be declined. Some pharmacies sell both medical and non-medical items; the card may decline if you try to buy shampoo or candy alongside your prescription.

Do I need to keep receipts for my FSA expenses?

Yes. Your FSA administrator may ask you to provide a receipt or proof of the expense at any time, even years later. Keep receipts for at least three to five years. If you cannot provide proof that an expense was may have access to, the administrator may ask you to repay the money to your FSA account.

Can I use my FSA for my spouse or children?

Yes, as long as they are covered under your health insurance plan or are your tax dependents. You can use your FSA to pay for their copays, prescriptions, dental work, and other may have access to medical expenses. The money in your FSA is not limited to your own medical costs.

What if I contribute to an FSA but don't use all the money?

Any money left in your FSA at the end of the year is forfeited — you lose it. This is why it's important to estimate carefully. If you think you might not spend all the money, contribute a smaller amount. If your employer offers a grace period, you have extra time to spend the remaining balance, but the money will still be lost if you don't use it by the grace period important date.