A flexible spending account is a tax-advantaged savings account your employer offers, where you set aside pre-tax money to pay for medical or dependent care expenses

A flexible spending account (FSA) is an employer-sponsored account that lets you contribute money before taxes are taken out of your paycheck. The money you put in can only be used for specific medical expenses or dependent care costs—you cannot withdraw it for anything else. The main advantage is that you avoid paying federal income tax, Social Security tax, and Medicare tax on the money you contribute, which typically saves you 20 to 40 percent depending on your tax bracket.

FSAs come in two types: a medical FSA (sometimes called a healthcare FSA) covers doctor visits, prescriptions, dental work, vision care, and other may have access to medical expenses; a dependent care FSA covers daycare, after-school programs, and adult day care for an elderly parent. You cannot use one type of FSA for the other type of expense. Most employers offer the medical version, some offer both, and a few offer only the dependent care version.

You choose how much to contribute during your employer's open enrollment period, usually once a year in the fall. The money comes out of your paycheck in equal amounts throughout the year. You then submit receipts or claim forms to get reimbursed, or you use a debit card linked to the account if your employer provides one.

Key Takeaways

  • Money in an FSA is deducted from your paycheck before taxes, which reduces your taxable income and saves you money on federal, Social Security, and Medicare taxes.
  • You must choose your contribution amount during open enrollment and cannot change it mid-year unless you have a may have access to life event such as a birth, marriage, or loss of other health coverage.
  • A medical FSA covers copays, deductibles, prescriptions, dental, vision, and other may have access to medical costs; a dependent care FSA covers daycare and elder care only.
  • Any money left in your FSA at the end of the year is forfeited—you cannot roll it over to the next year or withdraw it, with limited exceptions for medical FSAs.
  • You must submit receipts or use a linked debit card to prove expenses are may have access to before you receive reimbursement.

How money flows in and out of your FSA

When you enroll in an FSA, you decide on a dollar amount to contribute for the year. That amount is divided by the number of pay periods, and that portion is deducted from each paycheck before income taxes are calculated. For example, if you contribute $2,400 to a medical FSA and are paid biweekly, $92.31 comes out of each paycheck. Because this money is taken out before taxes, your taxable income is lower, which means you owe less in federal income tax, Social Security tax, and Medicare tax.

Throughout the year, when you incur a may have access to expense, you submit a claim to your FSA administrator (the company your employer hired to manage the account) along with a receipt or explanation of benefits from your provider. The administrator reviews the claim to confirm it is a may have access to expense, then reimburses you. Some employers provide an FSA debit card that you can use at the point of sale—for example, at a pharmacy or doctor's office—without submitting a separate claim, though you may still need to provide documentation later if the administrator requests it.

The money you contribute is yours to use, but only for the expenses your FSA type covers. If you do not use all the money by the end of the year, you lose it. This is called the "use-it-or-lose-it" rule, and it is one of the biggest drawbacks of an FSA. A few employers offer a grace period of up to 2.5 months into the next year, or a carryover of up to $610 (the amount changes yearly), but most do not.

What expenses a medical FSA covers

A medical FSA reimburses you for a wide range of healthcare costs. Covered expenses include copays and coinsurance (your share of the cost after insurance pays), deductibles, prescription medications, dental work (fillings, crowns, orthodontics), vision care (glasses, contacts, eye exams), hearing aids, mental health counseling, physical therapy, and medical equipment like crutches or blood pressure monitors. Over-the-counter medications like pain relievers and allergy medicine are covered only if you have a prescription from a doctor.

Expenses that are not covered include cosmetic procedures, gym memberships, vitamins without a medical condition, and most over-the-counter items without a prescription. If you are unsure whether an expense qualifies, your FSA administrator can tell you before you submit a claim.

What expenses a dependent care FSA covers

A dependent care FSA pays for childcare and adult day care expenses that allow you to work. Covered costs include daycare centers, in-home babysitters, after-school programs, summer camps (if they are primarily childcare rather than recreation), and adult day care for an elderly parent or disabled spouse. The person providing care can be a relative, but not your spouse or a dependent you claim on your taxes.

Expenses that are not covered include overnight camps, tuition at a school (even if the school provides before- and after-school care), babysitting for social events, and care provided by your spouse. The dependent care FSA is also subject to income limits: if you earn over a certain amount (which varies by year and employer), you may not be able to contribute the full amount or may not be able to use the account at all.

The use-it-or-lose-it rule and how to avoid losing money

At the end of each plan year, any money remaining in your FSA is forfeited. You cannot carry it over to the next year, and you cannot withdraw it. This rule exists because FSAs are tax-advantaged accounts, and the IRS wants to prevent people from using them as general savings vehicles. The consequence is that you need to estimate your expenses carefully when you choose your contribution amount.

To avoid losing money, calculate your expected medical or dependent care costs for the coming year. Include copays, prescriptions you take regularly, dental work you have scheduled, and daycare costs. Be conservative—it is better to contribute less and miss out on some tax savings than to contribute too much and forfeit money. If your employer offers a grace period or carryover, take advantage of it by contributing up to the maximum allowed.

If you have a may have access to life event—such as a birth, adoption, marriage, divorce, loss of other health coverage, or a significant change in your dependent care costs—you can change your FSA contribution mid-year. For example, if you have a baby, you can increase your dependent care FSA contribution to cover the new daycare costs. Your employer's benefits administrator can tell you which events may have access to.

How to claim reimbursement and what documentation you need

To get reimbursed from your FSA, you submit a claim form to your FSA administrator along with proof that you paid for a may have access to expense. Proof usually means a receipt from the provider, an explanation of benefits from your insurance company, or an invoice showing the date, amount, and type of service. Some administrators accept claims online through a website or mobile app; others require paper forms mailed in.

If you use an FSA debit card, you do not need to submit a claim at the point of sale. However, the administrator may ask you later to provide documentation to confirm the expense was may have access to. Keep all receipts for at least three to five years in case you are audited or the administrator requests proof.

Reimbursement typically takes one to two weeks after the administrator receives and approves your claim. Some employers allow you to request reimbursement even if you have not yet paid the expense out of pocket—for example, you can be reimbursed for a dental procedure scheduled for next month—but this varies by plan.

FSA contribution limits and tax savings

For 2024, the maximum you can contribute to a medical FSA is $3,200 per year; for a dependent care FSA, the maximum is $5,000 per year (or $2,500 if you are married and file taxes separately). These limits change annually and are set by the IRS. Your employer may set a lower limit, so check your plan documents.

The tax savings depend on your tax bracket. If you are in the 22 percent federal tax bracket and contribute $2,400 to a medical FSA, you save approximately $528 in federal income tax alone. Add in Social Security tax (6.2 percent) and Medicare tax (1.45 percent), and your total savings is closer to $750. The higher your tax bracket, the more you save.

However, the use-it-or-lose-it rule means that if you contribute money you do not spend, you lose the tax benefit on that amount. This is why it is critical to estimate your expenses accurately and not over-contribute.

Frequently Asked Questions

Can I use my FSA for my spouse or children?

Yes, you can use your medical FSA to pay for may have access to expenses for your spouse and any dependent children, even if they are not covered by your health insurance. You cannot use a dependent care FSA to pay for care of your spouse, but you can use it for childcare and elder care for a parent or in-law.

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

Any money remaining in your FSA is forfeited when you leave your job. You cannot take it with you or transfer it to a new employer's FSA. However, you may be able to continue coverage under COBRA (Consolidated Omnibus Budget Reconciliation Act) for a limited time, which would let you use the remaining balance. Check with your former employer's benefits administrator.

Can I use my FSA to pay for health insurance premiums?

No, you cannot use a medical FSA to pay for health insurance premiums, including those for your employer's plan. However, you can use it to pay for copays, deductibles, and other out-of-pocket costs once you have insurance. Some limited exceptions exist for COBRA premiums and long-term care insurance, but these are rare.

Is there a penalty if I do not use all my FSA money?

There is no penalty to you personally. The money simply stays with your employer or the FSA administrator at the end of the year. However, you lose the tax benefit on the unused amount, which is why careful planning is important.

Can I change my FSA contribution amount during the year?

No, unless you have a may have access to life event such as a birth, marriage, divorce, adoption, loss of health coverage, or a significant change in your dependent care costs. Open enrollment is the only time most people can change their contribution. If you think you have a may have access to event, contact your employer's benefits administrator right away.