What a health care spending account is
A health care spending account is a tax-advantaged savings account that lets you set aside pre-tax money from your paycheck to pay for medical expenses your insurance doesn't cover. The money comes out before income tax is calculated, which means you pay less in federal income tax that year. Your employer typically administers the account through payroll, and you decide how much to contribute each year during open enrollment.
The most common type is a Flexible Spending Account (FSA), which is offered by many employers. Some employers offer a Health Reimbursement Arrangement (HRA) instead, which works similarly but is funded entirely by the employer. Both let you pay for deductibles, copays, prescriptions, and other out-of-pocket medical costs with money that hasn't been taxed yet.
The catch is that FSAs operate on a "use it or lose it" rule: money you don't spend by the end of the plan year (usually December 31) goes back to your employer. Some plans allow a small carryover or a grace period, but most do not. This means you need to estimate your medical expenses carefully before you commit to a contribution amount.
Key Takeaways
- Health care spending accounts let you pay for medical expenses with pre-tax money, lowering your taxable income and the federal income tax you owe.
- FSAs are the most common type and are offered by many employers; you choose your contribution amount during open enrollment each year.
- Money in an FSA that you don't spend by the end of the plan year is forfeited, so you should estimate your medical costs before committing.
- You can use FSA funds to pay for copays, deductibles, prescriptions, and certain medical equipment and supplies, but not for insurance premiums or cosmetic procedures.
- You request reimbursement by submitting receipts and claims to your plan administrator, usually through an online portal or by mail.
How much you can contribute and when
The IRS sets an annual limit on how much you can contribute to an FSA. For 2024, the limit is $3,200 per person per year. Your employer may set a lower limit, so check your plan documents. You choose your contribution amount during your employer's open enrollment period, which typically happens once a year in the fall for coverage starting January 1.
Once you elect an amount, you cannot change it during the year unless 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 medical needs. Simply deciding you want to contribute more or less is not enough to change your election mid-year.
The money is deducted from your paycheck in equal installments throughout the year. If you contribute $2,400 annually, for example, $200 comes out of each monthly paycheck before taxes are calculated. This reduces your taxable income, which lowers your federal income tax bill.
What you can and cannot buy with FSA money
FSA funds can pay for a wide range of medical expenses, but the IRS has specific rules about what qualifies. You can use the money for copays, coinsurance, deductibles, prescription medications, insulin, and over-the-counter drugs (with a prescription). You can also pay for medical equipment like crutches, wheelchairs, blood pressure monitors, and glucose meters.
Dental and vision care are covered: FSA money can pay for dental cleanings, fillings, root canals, eyeglasses, contact lenses, and eye exams. Mental health services, physical therapy, and chiropractic care also may have access to. Some less obvious items are covered too—acupuncture, hearing aids, and certain medical supplies like bandages and first-aid kits.
You cannot use FSA funds for health insurance premiums, cosmetic procedures (unless medically necessary), over-the-counter medications without a prescription, or gym memberships. Vitamins and supplements are generally not covered unless prescribed by a doctor for a specific medical condition. If you are unsure whether an expense qualifies, ask your plan administrator or check the IRS publication on medical expenses.
How to request reimbursement
When you incur a medical expense, you pay for it out of pocket and then request reimbursement from your FSA plan administrator. Most plans let you submit claims through an online portal, where you upload a receipt or explanation of benefits from your provider. Some plans still accept paper claim forms sent by mail.
The receipt must show the date of service, the provider's name, the type of service or item, and the amount you paid. If you are reimbursed for a prescription, the pharmacy receipt usually includes all the information needed. For larger expenses, your health insurance company may send an explanation of benefits (EOB) that shows what you paid out of pocket; this document works as proof for your FSA claim.
Processing times vary by plan administrator, but reimbursement typically takes one to three weeks after you submit a complete claim. Some plans deposit the money directly into your bank account; others send a check. Keep copies of all receipts and claim confirmations in case your plan administrator asks for additional documentation later.
The "use it or lose it" rule and how to avoid losing money
At the end of each plan year, any money you have not spent is forfeited. If you contributed $2,400 and spent only $1,800, the remaining $600 goes back to your employer. This is why estimating your medical expenses accurately is critical.
Some employers offer a small grace period—usually 2.5 months into the next calendar year—during which you can still spend money from the previous year's account. A few plans allow you to carry over up to $610 (the 2024 limit) into the next year, but this is less common. Check your plan documents to see if either option applies to you.
To avoid forfeiting money, track your medical expenses throughout the year and adjust your contribution for the next year based on what you actually spent. If you have a chronic condition requiring regular prescriptions or frequent doctor visits, you can estimate more confidently. If your medical needs are unpredictable, contribute a smaller amount and use the account only for expenses you know are coming.
FSA versus other tax-advantaged accounts
FSAs are different from Health Savings Accounts (HSAs), which are paired with high-deductible health plans. HSAs let you carry money over year to year and invest it for long-term growth, making them better for people who can afford to save. FSAs have no investment option and no carryover, but they are available to more people because you do not need a high-deductible plan to use one.
Some employers offer an HRA instead of an FSA. The employer funds the HRA entirely, and you do not contribute from your paycheck. HRAs are less common but can be more generous because the employer decides how much to put in. Like FSAs, HRAs typically operate on a use-it-or-lose-it basis, though some employers allow carryover.
If your employer offers both an FSA and an HSA, you generally cannot contribute to both in the same year. If you have access to an HSA, compare the two: HSAs are better if you can afford to save long-term, while FSAs are better if you have predictable near-term medical expenses and want to reduce your taxes immediately.
What happens if you leave your job
If you leave your employer, you lose access to your FSA. Any money remaining in the account is forfeited, even if you have not reached the end of the plan year. This is one reason to be conservative with your FSA contribution if you think you might change jobs soon.
When you leave, you can request reimbursement for any expenses you incurred before your departure date, as long as you submit the claim before the deadline set by your plan administrator (usually 60 to 90 days after your last day). After that, the account closes and any remaining balance is gone.
If you move to a new job with an FSA, you start fresh with a new contribution election during that employer's open enrollment. You cannot transfer money from your old FSA to the new one.
Frequently Asked Questions
Can I use my FSA debit card to pay for medical expenses directly?
Many FSA plans issue a debit card that you can use at pharmacies, doctor's offices, and medical supply stores. The card is linked to your FSA balance and deducts money automatically. However, some merchants' systems cannot process FSA cards, so you may still need to pay out of pocket and request reimbursement later. Check whether your plan offers a debit card and which merchants accept it.
What if I contribute too much and do not spend it all?
The money is forfeited at the end of the plan year. To minimize this risk, estimate your medical expenses conservatively and contribute only what you are confident you will spend. If you have a grace period or carryover option, you have more flexibility, but most plans do not offer either.
Can I use FSA money to pay for my spouse's or child's medical expenses?
Yes, as long as they are covered under your health insurance plan or are your tax dependents. You can use your FSA to pay for their copays, prescriptions, and other may have access to medical expenses. Keep receipts showing their name and the service provided.
Do I have to submit receipts for every FSA claim?
Yes, your plan administrator will ask for proof of the expense. This can be a pharmacy receipt, a doctor's office receipt, or an explanation of benefits from your insurance company. Some plans may audit claims randomly, so keep all documentation for at least three to five years.
What if my employer changes or cancels the FSA plan?
If your employer cancels the plan mid-year, you typically have a limited time to spend your remaining balance or request reimbursement. Your plan administrator will notify you of the deadline. If the plan is simply changed to a different administrator, your balance usually transfers to the new plan without interruption.