How an FSA works in three steps

A Flexible Spending Account (FSA) is a workplace account where you set aside pre-tax money for medical or dependent care costs. You decide how much to contribute during your employer's open enrollment period, that money comes out of your paycheck before taxes, and you use a debit card or submit receipts to withdraw it for covered expenses. The catch: money you don't spend by the end of the plan year is forfeited — you cannot roll it over to the next year or take it with you.

The account sits between you and your employer. Your employer sets up the plan through a third-party administrator (often a company like WageWorks, HealthEquity, or Conduent), who manages the money, issues the debit card, processes your claims, and tracks your balance. You never touch the money directly; it flows from your paycheck to the FSA account to the provider or pharmacy when you make a purchase.

The tax savings come first. Because FSA contributions are deducted before federal income tax, Social Security tax, and Medicare tax are calculated, you pay less in taxes overall. If you contribute $2,500 to an FSA and your combined tax rate is 25 percent, you save roughly $625 in taxes that year — money that stays in your pocket instead of going to the IRS.

Key Takeaways

  • You choose your FSA contribution amount once per year during open enrollment, and that money is deducted from each paycheck before taxes are calculated.
  • FSA money can only be spent on IRS-approved medical expenses (like copays, deductibles, and prescriptions) or dependent care (like daycare or after-school programs), depending on which type of FSA you have.
  • You access the money using a debit card issued by your FSA administrator, or by paying out of pocket and submitting receipts for reimbursement.
  • Any money left in your FSA at the end of the plan year is forfeited; there is no rollover to the next year and no way to get it back.
  • If you leave your job, you have a limited window (usually 60 days) to submit claims for expenses you already incurred, but you cannot take unused money with you.

The two types of FSAs and what each covers

Most employers offer a health care FSA, which covers medical, dental, and vision expenses. This includes copays, coinsurance, deductibles, prescription drugs, glasses, contact lenses, hearing aids, and certain medical equipment. The IRS publishes a full list of covered items, and your FSA administrator can tell you whether a specific expense qualifies.

Some employers also offer a dependent care FSA, which covers the cost of childcare, preschool, after-school programs, and adult day care for a dependent you claim on your taxes. It does not cover school tuition (except for preschool), summer camp, or babysitting for date nights. If your employer offers both, you can contribute to each one in the same year, but the dependent care FSA has a separate contribution limit.

A few employers offer both types; many offer only health care. Check your employer's benefits guide or ask your HR department which FSAs are available to you. You can only enroll during open enrollment or within 30 to 60 days of a may have access to life event (marriage, birth, job loss, or a change in your dependent care costs).

How to use FSA money: the debit card and the receipt route

Most FSA administrators issue a debit card that works at pharmacies, doctors' offices, and other providers that accept FSA payments. When you swipe the card, the transaction is checked against IRS rules in real time. If the expense is covered, the payment goes through; if not, the card declines. This is the fastest way to spend FSA money because there is no paperwork.

However, not every provider accepts FSA debit cards — some smaller practices, therapists, or specialty clinics may not have the infrastructure. In those cases, you pay out of pocket and then submit a claim to your FSA administrator. You will need a receipt showing the date, the provider's name, the service or item, and the amount paid. The administrator reviews it, confirms it is a covered expense, and reimburses you within one to two weeks.

Keep receipts for at least three years. Your FSA administrator may audit your account and ask you to prove that expenses were real and covered. If you cannot provide documentation, you may have to repay the reimbursement.

Contribution limits and how much you can set aside

The IRS sets annual contribution limits for FSAs, and these limits change each year. For 2024, the health care FSA limit is $3,200 per person per year. The dependent care FSA limit is $5,000 per household per year (or $2,500 if you are married and file taxes separately). These are the maximum amounts you can contribute; you can contribute less if you choose.

Your contribution is spread across your paychecks over the plan year. If you contribute $2,400 to a health care FSA and you are paid biweekly, roughly $92 comes out of each paycheck (before taxes). You decide the amount during open enrollment, and you cannot change it mid-year unless you have a may have access to life event.

The limits are per person for health care FSAs but per household for dependent care FSAs. If you and your spouse both work and both have access to health care FSAs through your employers, you can each contribute up to the limit through your own employer's plan. For dependent care, the household limit applies regardless of how many employers offer the benefit.

The use-it-or-lose-it rule and what happens to unspent money

This is the most important rule to understand: money left in your FSA at the end of the plan year does not roll over. If you contribute $2,500 and spend only $1,800, the remaining $700 is forfeited. You cannot withdraw it, transfer it, or use it next year. It goes back to your employer or is used to pay FSA administrative costs.

There is one exception: the grace period. Some employers allow a 2.5-month grace period after the plan year ends (so through mid-March if your plan year ends December 31). During this time, you can submit claims for expenses you incurred during the grace period, and the money comes from the previous year's FSA balance. Not all employers offer this, so check your plan documents.

Because of this rule, you need to estimate carefully how much you will spend on covered expenses in the coming year. Overestimate and you lose money; underestimate and you pay out of pocket for expenses that could have been pre-tax. Many people contribute a conservative amount — enough to cover predictable costs like copays and prescriptions, but not so much that they risk forfeiting money.

What happens to your FSA if you leave your job

If you resign, are laid off, or are fired, your access to the FSA ends on your last day of employment. However, you have a limited window — usually 60 days, though this varies by plan — to submit claims for medical or dependent care expenses you already incurred while employed. You cannot submit claims for expenses after your employment ends.

Any unused balance in your FSA is forfeited. You cannot take it with you, roll it into a new employer's FSA, or transfer it to an IRA. If you had $800 left in your account on your last day, that money is gone. This is another reason to spend down your FSA balance before you leave a job if you know it is coming.

If you are laid off or fired involuntarily, you may be able to continue your FSA coverage under COBRA (the Consolidated Omnibus Budget Reconciliation Act), but you will have to pay the full premium yourself, including the employer's share. COBRA continuation is expensive and usually lasts only 18 months, so most people do not choose this option for an FSA.

FSA vs. HSA: when each one makes sense

An HSA (Health Savings Account) is similar to an FSA but works differently in one critical way: unused money rolls over year to year and can grow indefinitely. However, you can only open an HSA if you are enrolled in a high-deductible health plan (HDHP), and not all employers offer HSAs. An FSA has no HDHP requirement and is more widely available.

FSAs have higher contribution limits than HSAs in some years, but HSAs allow you to invest the money and use it for retirement. An FSA is "use it or lose it"; an HSA is a long-term savings vehicle. If your employer offers both, the choice depends on whether you prefer the tax break now (FSA) or the ability to save and invest for future medical costs (HSA).

Some employers allow you to have both an FSA and an HSA, but the FSA can only cover dependent care, not medical expenses. This is called a limited-purpose FSA. If your employer offers this setup, you can contribute to both the HSA (for medical costs) and the dependent care FSA (for childcare) in the same year.

Frequently Asked Questions

Can I use my FSA debit card at any pharmacy or doctor?

Most major pharmacies and large medical providers accept FSA debit cards, but not all. Smaller practices, independent pharmacies, and some therapists or specialists may not have the system set up. If the card declines, ask the provider if they accept FSA payments by mail or phone, or pay out of pocket and submit a receipt for reimbursement.

What happens if I submit a claim for an expense that is not covered?

Your FSA administrator will deny the claim and send you a letter explaining why. You will not be reimbursed, and the money stays in your account. You can appeal if you believe the expense should be covered, but the IRS rules are strict. If the appeal is denied, you lose that money when the plan year ends.

Can I change my FSA contribution mid-year?

No, unless you have 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 dependent care costs. If you experience one of these events, you usually have 30 to 60 days to change your contribution. Otherwise, you are locked in until the next open enrollment.

What if I do not spend all my FSA money before the plan year ends?

The unused balance is forfeited. Some plans offer a grace period (usually 2.5 months after the plan year ends) to submit claims for expenses incurred during that time, but this is optional and not all employers offer it. Check your plan documents to see if your employer does.

Can I use my FSA for over-the-counter medications?

Yes, but only if you have a prescription from a doctor. Over-the-counter medications like ibuprofen or cold medicine are not covered unless a doctor writes a prescription for them. Vitamins and supplements are generally not covered, even with a prescription, unless they treat a specific medical condition.