What an FSA is and how the money works

A Flexible Spending Account (FSA) is a workplace account where you set aside pre-tax money to pay for medical and dependent care costs. You choose how much to contribute each year during your employer's open enrollment period, and that money comes out of your paycheck before income tax is calculated. When you need to pay for a covered expense, you submit a receipt or claim form to your FSA administrator, and they reimburse you from your account balance.

The pre-tax part is the main advantage: because the money never gets taxed as income, you pay less in federal income tax and Social Security 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. You only pay tax on the money you actually spend on covered expenses.

FSAs are separate from your health insurance plan, though most employers offer them alongside their insurance. Your FSA administrator is usually a third-party company that your employer contracts with — not your insurance company. You can use FSA money to pay deductibles, copays, and coinsurance on your health plan, but you can also use it for many costs your insurance doesn't cover at all, like dental work, vision care, or over-the-counter medications.

Key Takeaways

  • FSA money comes from your paycheck before taxes, which reduces your taxable income and the amount you owe in federal and Social Security tax.
  • You choose your contribution amount once a year during open enrollment, and that amount is locked in unless you have a may have access to life change like marriage or a new job.
  • FSAs have an annual contribution limit set by the IRS, which changes each year and is lower than most other retirement or health savings accounts.
  • Money left in your FSA at the end of the year is forfeited — you cannot carry it over to the next year, with limited exceptions for dependent care FSAs.
  • You can use FSA funds for a wide range of medical and dependent care costs, including some expenses your health insurance does not cover.

Annual contribution limits and how they compare

The IRS sets a maximum contribution limit for FSAs each year, and it changes annually. For 2024, the limit is $3,200 for medical FSAs. For dependent care FSAs (used to pay for childcare or adult dependent care), the limit is $5,000 per household per year, or $2,500 if you are married and file taxes separately.

These limits are lower than most other tax-advantaged accounts. A Health Savings Account (HSA), by contrast, allows contributions up to $4,150 for individual coverage in 2024. However, FSAs have one advantage: you do not need to be enrolled in a high-deductible health plan to use one, whereas an HSA requires it. If your employer offers both, you can use an FSA alongside a regular health insurance plan, or pair an HSA with a high-deductible plan.

The IRS adjusts these limits each January, so the amount you can contribute changes from year to year. Your employer's benefits administrator will tell you the current limit during open enrollment.

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

Money remaining in your FSA at the end of the plan year is forfeited — you lose it. This is called the use-it-or-lose-it rule, and it is one of the most important things to understand about FSAs. If you contribute $2,500 and only spend $1,800 on medical costs by December 31, the remaining $700 goes back to your employer. You cannot roll it over to the next year or withdraw it.

There is one exception: dependent care FSAs are allowed a carryover of up to $550 for the 2024 plan year. Some employers also offer a grace period of up to 2.5 months into the next year to spend down your balance, though this is optional and not all employers provide it. Check with your benefits administrator to see if your plan includes a grace period.

Because of this rule, you need to estimate carefully how much you will actually spend on covered expenses in the coming year. Overestimating means forfeiting money; underestimating means paying out of pocket for costs you could have covered tax-free. Many people contribute a conservative amount — enough to cover predictable costs like regular copays or prescription refills — rather than the full limit.

What expenses you can and cannot pay for with FSA funds

FSAs cover a broad range of medical expenses, including copays, coinsurance, deductibles, and prescription medications. You can also use FSA money for dental work, vision care (including glasses and contact lenses), hearing aids, and mental health treatment. Over-the-counter medications like pain relievers, allergy medicine, and cold medicine are covered, as long as you have a prescription from a doctor (or a letter from your doctor stating medical necessity).

Physical therapy, chiropractic care, acupuncture, and certain medical equipment like crutches or blood pressure monitors are covered. Dependent care FSAs specifically cover costs for childcare, preschool, and adult day care for a dependent you claim on your taxes — but not overnight camps or tuition for school-age children.

Expenses that are not covered include health insurance premiums (with narrow exceptions), cosmetic procedures, gym memberships, vitamins without a medical condition, and most over-the-counter items without a prescription. Costs for a spouse or dependent you do not claim on your taxes are also not covered. The IRS publishes a detailed list of covered and non-covered expenses; your FSA administrator can also tell you whether a specific cost qualifies.

How to claim reimbursement and what documents you need

When you have a covered expense, you submit a claim to your FSA administrator. Most administrators now offer online portals or mobile apps where you can upload a photo of your receipt. Some still accept paper claim forms mailed in. The process usually takes one to two weeks.

You will need to provide a receipt or explanation of benefits (EOB) from your provider showing the date of service, the amount charged, and what was paid. For prescription medications, your pharmacy receipt works. For medical services, your provider's invoice or your insurance company's EOB is acceptable. Some administrators use a debit card linked to your FSA, which lets you pay directly at the point of service without submitting a claim afterward — though you may still need to provide documentation if the administrator requests it.

Keep all receipts and documentation for at least three years in case your FSA administrator audits your account. The IRS can also request proof that expenses were actually incurred and were covered under the plan rules.

FSAs versus HSAs and other health savings options

FSAs and Health Savings Accounts (HSAs) both use pre-tax money for medical expenses, but they work differently. An HSA requires enrollment in a high-deductible health plan and has higher contribution limits ($4,150 for individual coverage in 2024). HSA money rolls over year to year and can be invested, making it a long-term savings tool. FSA money does not roll over and must be spent within the plan year.

A Dependent Care FSA is different from a medical FSA and serves a specific purpose: paying for childcare or adult dependent care. You cannot use dependent care FSA money for medical expenses, and you cannot use a medical FSA for childcare. Some employers offer both types, and you can contribute to each separately up to their respective limits.

If your employer offers both an FSA and an HSA, you generally cannot contribute to both in the same year — the IRS treats them as competing accounts. However, if you have an HSA from a previous job or a spouse's job, you may be able to keep it while using your current employer's FSA. Check with your benefits administrator about your specific situation.

Enrollment, changes, and what happens when you leave your job

You enroll in an FSA during your employer's open enrollment period, which is usually once a year in the fall for a plan year starting January 1. You choose your contribution amount and confirm which type of FSA (medical, dependent care, or both) you want. Once enrollment closes, 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 your dependent care costs.

If you leave your job, your FSA ends. You have a limited time — usually 60 to 90 days — to submit any remaining claims for expenses you incurred while employed. After that important date, any unspent balance is forfeited. You cannot transfer FSA money to a new employer's plan or to an HSA. If you move to a new job with an FSA, you start fresh with a new account and a new contribution amount.

Some employers offer COBRA continuation coverage for FSAs, which lets you keep your account for a limited time after you leave, but you must pay the full premium yourself (both the employee and employer portions). This is rarely cost-effective for FSAs because the account still expires at the end of the plan year.

Frequently Asked Questions

Can I use my FSA for my spouse or children?

You can use FSA money for medical expenses of your spouse and children only if you claim them as dependents on your tax return. If your spouse has their own income and files separately, or if a child is over 26 and independent, you cannot use your FSA for their expenses. Dependent care FSAs have similar rules — you must claim the dependent on your taxes to use the account for their care costs.

What happens if I contribute too much and do not spend it all?

The unspent money is forfeited at the end of the plan year. This is why it is important to estimate conservatively. If you are unsure how much you will spend, contribute enough to cover predictable costs like regular copays or prescriptions, rather than the full limit. Some employers offer a grace period of up to 2.5 months into the next year to spend remaining funds.

Can I withdraw FSA money for non-medical expenses?

No. Withdrawing FSA money for non-covered expenses triggers taxes on the amount withdrawn plus a 20 percent penalty. The only exception is if you have a may have access to life event that ends your FSA coverage — in that case, you can claim remaining expenses you incurred while the account was active, but you still cannot withdraw cash.

Do I need to be enrolled in my employer's health insurance to use an FSA?

No. You can use a medical FSA even if you are covered by a spouse's health plan, a parent's plan, or Medicare. You do not need to be enrolled in your employer's specific health insurance to contribute to their FSA. However, you must be employed by the company offering the FSA.

Can I use my FSA debit card everywhere?

FSA debit cards work at pharmacies, doctor's offices, and medical suppliers, but not at all retailers. They are blocked at grocery stores, gas stations, and general merchandise stores because those places sell non-medical items. If you try to use the card at an ineligible merchant, it will be declined. For those purchases, you pay out of pocket and submit a receipt for reimbursement instead.