An FSA is a tax-advantaged savings account for medical and dependent care costs

A Flexible Spending Account (FSA) is a savings account that your employer offers, where you set aside pre-tax money to pay for medical expenses or dependent care. The money comes out of your paycheck before taxes are calculated, which means you pay less in federal income tax, Social Security tax, and Medicare tax. You then use the FSA debit card or submit receipts to withdraw that money and pay for covered expenses.

FSAs come in two types: a medical FSA (sometimes called a healthcare FSA) covers doctor visits, prescriptions, dental work, and other medical costs; a dependent care FSA covers daycare, preschool, or after-school care for children under 13, or adult day care for a dependent. Most employers offer the medical version, some offer both, and a few offer only dependent care.

The main trade-off is the "use-it-or-lose-it" rule: money you don't spend by the end of the plan year (usually December 31) is forfeited. Some employers allow a grace period of up to 2.5 months into the next year, or let you carry over up to $640 per year, but this varies. You need to estimate carefully how much you'll spend.

Key Takeaways

  • FSA money is deducted from your paycheck before taxes, lowering your taxable income and the taxes you owe.
  • You can use an FSA for medical expenses (doctor visits, prescriptions, dental, vision) or dependent care (childcare, adult day care), depending on which type your employer offers.
  • 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 the amount you choose stays fixed for the entire year.

How much you can contribute and who can open one

You can only open an FSA through your employer—you cannot buy one on your own. During your company's open enrollment period (usually in the fall for a plan year starting January 1), you choose how much to contribute for the coming year. For 2024, the IRS limit for a medical FSA is $3,200 per year; for a dependent care FSA, it's $5,000 per year for married couples filing jointly or single filers, and $2,500 for married couples filing separately. These limits change yearly.

You must be employed to have an FSA, and you must enroll during open enrollment or within 30 days of a may have access to life event (marriage, birth of a child, loss of other health coverage). If you miss open enrollment and have no may have access to event, you cannot open an FSA until the next enrollment period.

If you leave your job, your FSA ends. You can sometimes continue using the account through COBRA (Consolidated Omnibus Budget Reconciliation Act) to spend remaining funds, but rules vary by employer. Once you leave, you cannot add new money to the account.

What expenses are covered by a medical FSA

A medical FSA covers a broad range of out-of-pocket health costs. Common covered expenses include doctor visit copays, prescription medications, dental work (cleanings, fillings, crowns, orthodontics), vision care (eye exams, glasses, contact lenses), hearing aids, and medical equipment like crutches or blood pressure monitors. You can also use FSA funds for over-the-counter items if they treat a specific medical condition—for example, antacids for acid reflux or pain relievers for a headache, but not vitamins or supplements taken for general wellness.

Expenses that are not covered include cosmetic procedures, gym memberships, general wellness products, and most over-the-counter items unless they treat a diagnosed condition. Health insurance premiums, copays for insurance itself, and long-term care insurance are also not covered.

To use FSA funds, you typically receive a debit card that you swab at the pharmacy or doctor's office. For some expenses, you may need to submit a receipt and a claim form to your FSA administrator to get reimbursed. Keep all receipts—the IRS requires proof that expenses were medically necessary.

How a dependent care FSA works

A dependent care FSA works the same way as a medical FSA but covers childcare and adult care costs instead. You can use it to pay for daycare centers, in-home nannies, preschool, after-school programs, summer camps, and adult day care for an aging parent or disabled spouse. The child or dependent must be under age 13 (or any age if disabled) and claimed as a dependent on your tax return.

You cannot use a dependent care FSA to pay for overnight camps, school tuition for kindergarten and above, or babysitting for entertainment purposes (like a night out). The care must be necessary so that you and your spouse can work.

Unlike a medical FSA, you do not receive a debit card. Instead, you submit receipts and claim forms to your FSA administrator for reimbursement. Some employers allow you to pay the provider directly and then submit the receipt; others require you to pay out of pocket first and then seek reimbursement.

The tax savings and the use-it-or-lose-it rule

The main benefit of an FSA is the tax savings. If you contribute $2,000 to a medical FSA and your combined federal, state, and Social Security tax rate is roughly 25 to 30 percent, you save $500 to $600 in taxes on that $2,000. Over a year, that adds up. The trade-off is that you must estimate your spending accurately.

Money you don't spend by the end of the plan year is forfeited—you lose it. Some employers offer a grace period of up to 2.5 months into the next year to spend remaining funds, or allow you to carry over up to $640 to the next year, but these are optional employer choices and not may provide. Check your plan documents to see what your employer offers.

Because of this rule, many people contribute a conservative amount—enough to cover predictable costs like regular prescriptions or daycare, but not so much that they risk losing money. If you have a major medical expense planned (surgery, dental work), that's a good year to contribute more.

How to enroll and manage your FSA

Enrollment happens once per year during your employer's open enrollment period, which is usually in October or November for a plan year starting January 1. You log into your company's benefits portal, select the FSA option, and enter the amount you want to contribute for the year. That amount is divided by the number of pay periods and deducted from each paycheck.

Once enrolled, you cannot change your contribution amount 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 childcare costs. If you experience one of these events, you typically have 30 days to update your election.

Throughout the year, you can log into your FSA administrator's website or app to check your balance, submit claims, and track spending. Keep all receipts for at least three to five years in case the IRS audits your return. At the end of the plan year, use up any remaining balance before the important date, or it will be forfeited.

FSA vs. HSA: key differences

An HSA (Health Savings Account) is similar to an FSA but works differently. An HSA is portable—you own it and keep it even if you change jobs—while an FSA ends when you leave your employer. An HSA has no use-it-or-lose-it rule; money rolls over year to year and can grow like a savings account. However, you can only open an HSA if you are enrolled in a high-deductible health plan (HDHP), while an FSA is available to anyone whose employer offers one.

An HSA also has lower annual contribution limits than an FSA (for 2024, $4,150 for individual coverage and $8,300 for family coverage), but the money can be invested and grow over time. An FSA is simpler if you have predictable annual medical costs; an HSA is better if you want long-term savings and portability.

Frequently Asked Questions

Can I use my FSA for my spouse or children?

For a medical FSA, yes—you can use the funds for any family member you claim as a dependent on your tax return, including your spouse and children. For a dependent care FSA, the care must be for a child under 13 or a disabled dependent, and you must be working (or your spouse must be working) for the expense to be covered.

What happens to my FSA money if I quit my job mid-year?

Your FSA ends when you leave your employer. You may be able to continue using remaining funds through COBRA, but you cannot add new contributions. Any unspent money after the COBRA period ends is forfeited. Check with your employer's benefits department about COBRA options before you leave.

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

The FSA debit card works at most pharmacies, doctor's offices, and medical suppliers, but not all. Some smaller providers may not accept it. If the card is declined, you can pay out of pocket and submit a receipt to your FSA administrator for reimbursement. Always keep receipts as proof of the expense.

What if I estimate wrong and contribute too much?

If you contribute more than you spend and your employer does not offer a grace period or carryover, that money is forfeited. There is no refund. This is why it's important to estimate conservatively and only contribute what you're confident you'll spend. If your employer offers a grace period, you have extra time to spend the remaining balance.

Can I have both an FSA and an HSA at the same time?

No. If you have an HSA, you cannot also have a medical FSA. However, you can have an HSA and a dependent care FSA at the same time, since they cover different things. Check your employer's plan rules to confirm what combinations are allowed.