FSA funds are pretax dollars your employer sets aside for you to pay medical costs that insurance doesn't cover

A Flexible Spending Account (FSA) holds money deducted from your paycheck before taxes are calculated. You decide how much to contribute each year during open enrollment, and your employer deposits that amount into your FSA account throughout the year. You then use the card or request reimbursement to pay for specific medical expenses the IRS allows.

The main advantage is tax savings: money in an FSA is not subject to federal income tax, Social Security tax, or Medicare tax. If you contribute $2,500 to an FSA and your combined tax rate is 25 percent, you save roughly $625 in taxes that year. The tradeoff is the "use-it-or-lose-it" rule — money you don't spend by the end of the plan year (or a short grace period, if your employer offers one) goes back to your employer.

FSA funds are different from Health Savings Account (HSA) funds, which roll over year to year and have fewer restrictions on what you can buy. They are also different from Dependent Care FSAs, which cover childcare and adult daycare only, not medical expenses.

Key Takeaways

  • FSA funds come from your own paycheck, taken out before income taxes, so you pay less in taxes overall.
  • You can spend FSA money on copays, deductibles, prescriptions, and specific medical supplies, but not on insurance premiums or over-the-counter items without a prescription.
  • Money left unspent at the end of the plan year is forfeited unless your employer offers a grace period of up to 2.5 months.
  • You choose your FSA contribution amount once per year during open enrollment, and you cannot change it mid-year unless you have a may have access to life event.

What You Can Pay for with FSA Funds

The IRS publishes a list of may have access to medical expenses that FSA funds can cover. These include copays and coinsurance for doctor visits, dental work, vision care, and mental health treatment. Prescription medications are covered, as are insulin and other diabetes supplies.

Medical equipment and supplies count if they treat or prevent a diagnosed condition: crutches, wheelchairs, hearing aids, blood pressure monitors, and glucose meters all may have access to. Bandages, first-aid supplies, and over-the-counter pain relievers do not — unless you have a prescription from a doctor for the specific item.

Deductibles you owe before insurance kicks in are a common FSA use. If your health plan has a $1,500 deductible and you pay $800 of it out of pocket, you can reimburse yourself from your FSA. Therapy and counseling sessions, including copays, are covered. Dental cleanings, fillings, and orthodontia (braces) are covered. Vision exams, glasses, and contact lenses are covered.

Expenses that do not may have access to include health insurance premiums (with narrow exceptions for COBRA and long-term care insurance), cosmetic procedures, gym memberships, and vitamins or supplements unless prescribed by a doctor for a specific medical condition.

How to Use Your FSA Card or Request Reimbursement

Most employers issue an FSA debit card that you can swipe at pharmacies, doctor offices, and medical suppliers. The card draws directly from your FSA balance. Some providers require you to submit a receipt or explanation of benefits (EOB) from your insurance to prove the expense was medical and not covered by insurance.

If you don't have a card or prefer to pay out of pocket, you can submit a reimbursement request to your FSA administrator. You'll need to provide an itemized receipt showing what you paid for and proof that it's a may have access to expense. The administrator reviews your claim and deposits the reimbursement into your bank account, usually within one to two weeks.

Keep all receipts and EOBs for at least three years. The IRS can audit FSA claims, and you'll need documentation to prove expenses were may have access to and not already paid by insurance.

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

Any FSA balance remaining on December 31 (or your plan year end date) is forfeited. This is a hard rule set by the IRS — you cannot roll unused funds into the next year, and your employer cannot refund the money to you.

Some employers offer a grace period of up to 2.5 months after the plan year ends. During this time, you can still submit claims for expenses you incurred during the grace period. For example, if your plan year ends December 31 and your employer offers a 2.5-month grace period, you can submit claims through March 15 for expenses incurred between January 1 and March 15. Money spent during the grace period comes from the prior year's FSA balance.

Not all employers offer a grace period, and the length varies. Check your plan documents or ask your benefits administrator whether your FSA has one. If it does, you have more flexibility to spend down your balance without losing money.

Choosing Your FSA Contribution Amount

During open enrollment, you decide how much to contribute to your FSA for the coming year. The IRS sets an annual limit, which changes each year. For 2024, the limit is $3,200; for 2025, it is $3,300. Your employer may set a lower limit.

The challenge is predicting your medical expenses. If you contribute $2,500 but only spend $1,800, you lose $700. If you contribute $1,500 but spend $2,200, you pay the extra $700 out of pocket with after-tax dollars. Most people estimate based on past years: prescription refills, regular copays, dental work, and vision exams they know are coming.

You can change your FSA contribution only during open enrollment or if you have a may have access to life event — marriage, divorce, birth of a child, loss of other health coverage, or a significant change in your employer's plan. A job change or salary increase alone does not may have access to.

FSA vs. HSA: When Each Makes Sense

An HSA (Health Savings Account) is available only if you have a high-deductible health plan (HDHP). HSA funds roll over year to year, so there is no use-it-or-lose-it pressure. You can invest HSA funds and withdraw them tax-free for medical expenses at any age. However, HSAs have lower annual contribution limits than FSAs, and not all employers offer them.

An FSA makes sense if you have predictable medical expenses each year and want to maximize tax savings now. Use an FSA if you know you'll spend the money — on regular prescriptions, copays, dental work, or vision care — before the year ends. An HSA makes sense if you want to save for future medical expenses and have the flexibility to let the money grow.

Some employers offer both an FSA and an HSA. If yours does, you cannot contribute to both in the same year — the IRS prohibits it. Choose based on your expected spending and whether you want to save long-term.

Common Mistakes to Avoid

The biggest mistake is overestimating how much you'll spend and losing money at year-end. Start conservatively — contribute only what you're confident you'll use. You can always increase your contribution next year if you underspend.

Another common error is buying over-the-counter items without a prescription. Aspirin, cold medicine, allergy pills, and antacids do not may have access to unless a doctor writes a prescription for the specific item. Some people assume anything from a pharmacy counts; it doesn't.

A third mistake is not tracking receipts. If your FSA administrator asks for proof of an expense and you can't provide it, they may deny the reimbursement and you'll owe the money back. Keep receipts and EOBs organized in a folder or digital file.

Finally, don't assume your FSA card will always work. Some merchants' systems don't recognize FSA cards, or the card may be declined if the expense is not in the IRS database. Always have a backup plan to pay out of pocket and request reimbursement later.

Frequently Asked Questions

Can I use FSA funds for my spouse or children?

Yes, as long as they are your tax dependents and the expense is for them. You can use your FSA to pay for your spouse's copays, your child's braces, or your parent's hearing aid if you claim them as dependents on your tax return. The expense must still be a may have access to medical expense.

What happens to my FSA if I leave my job?

You lose access to your FSA balance when ready. Any unspent money goes back to your employer. You may be able to continue coverage under COBRA (Consolidated Omnibus Budget Reconciliation Act) for a limited time, which would let you keep your FSA, but you'll pay the full premium yourself. Check with your benefits administrator about COBRA options.

Can I use FSA funds to pay for my pet's medical care?

No. FSA funds cover medical expenses for humans only. Veterinary care, even for a service animal, does not may have access to. The only exception is a guide dog or service animal's training and care if it is considered a medical device under IRS rules, which is rare and requires documentation.

Do I need a receipt every time I use my FSA card?

Not always. If you use your card at a pharmacy or doctor's office, the merchant's system usually codes the transaction as medical, and no receipt is required. If you use it at a general retailer or the transaction is unclear, your FSA administrator may ask for a receipt to verify it was a may have access to expense. Keep receipts anyway — they're your proof if there's ever a dispute.

Can I carry over unused FSA money if my employer offers a grace period?

Only during the grace period itself. If your plan year ends December 31 and you have a 2.5-month grace period, you can spend money from your prior-year FSA balance through March 15 on expenses incurred during that window. After the grace period ends, any remaining balance is forfeited. The grace period does not let you roll money into the next plan year.