A flexible savings account lets you set aside pre-tax money for medical expenses you know are coming

A Flexible Spending Account (FSA) is a workplace benefit that lets you put money into an account before taxes are taken out of your paycheck. You then use that money to pay for medical, dental, or vision expenses that your health insurance doesn't fully cover. The main advantage is that you avoid paying federal income tax, Social Security tax, and Medicare tax on the money you set aside — which means you keep more of your paycheck than if you paid for those expenses with after-tax dollars.

FSAs are offered by employers, not banks, and they're tied to your job. You choose how much to contribute during your company's open enrollment period each year, and that amount is deducted from your paychecks throughout the year. You can use the money immediately — you don't have to wait until you've contributed the full amount. The catch is that FSA money is "use it or lose it": anything you don't spend by the end of the plan year is forfeited, though some employers allow a small carryover or a grace period.

Key Takeaways

  • FSA contributions come out of your paycheck before taxes, which reduces your taxable income and the amount of federal tax you owe.
  • You can use FSA money for copays, deductibles, prescription drugs, dental work, glasses, and other medical costs your insurance doesn't cover in full.
  • Money you don't spend by the end of the plan year is lost unless your employer offers a carryover or grace period.
  • You must be enrolled in your employer's health plan to open an FSA, and you can only change your contribution during open enrollment or after a life event like marriage or job loss.

What expenses you can pay for with FSA money

FSA funds cover a wide range of medical, dental, and vision costs. Common uses include copays and coinsurance for doctor visits, prescription medications, dental cleanings and fillings, eyeglasses and contact lenses, hearing aids, and over-the-counter items like pain relievers and allergy medicine (though you now need a prescription or doctor's note for some OTC drugs). Physical therapy, mental health counseling, and lab tests also may have access to.

The IRS publishes a list of what counts as a medical expense, and it's longer than most people expect. Orthodontia, acupuncture, and certain medical equipment all may have access to. However, cosmetic procedures, gym memberships, and vitamins without a medical reason do not. If you're unsure whether something qualifies, your FSA plan administrator can tell you before you spend the money.

How much you can contribute and how it affects your taxes

The IRS sets a maximum contribution limit each year. For 2024, the limit is $3,300 for self-only coverage. If your employer offers a family FSA, the limit is higher. Your employer may set a lower limit, so check your plan documents. You choose your contribution amount during open enrollment, and it's deducted from your paycheck in equal installments throughout the year.

The tax savings depend on your income and tax bracket. If you contribute $2,000 to an FSA and you're in the 22% federal tax bracket, you save roughly $440 in federal taxes alone, plus Social Security and Medicare taxes. The lower your tax bracket, the smaller the savings; the higher your bracket, the larger. This is why an FSA makes the most sense if you know you'll have medical expenses and you're in a higher tax bracket.

The "use it or lose it" rule and carryover options

At the end of each plan year, any money left in your FSA is forfeited — you cannot roll it over to the next year or withdraw it. This is the biggest drawback of an FSA. If you contribute $2,500 and only spend $1,800, you lose the remaining $700. Because of this rule, you should contribute only what you're confident you'll spend.

Some employers offer a grace period of up to 2.5 months into the next year to spend the previous year's money, or a limited carryover of up to $610 (as of 2024) to the next plan year. Check your plan documents to see if your employer offers either option. If they do, you have a little more flexibility — but the carryover amount is still capped, so large balances are still lost.

How to access your FSA money

Your employer provides an FSA debit card or a reimbursement process. With a debit card, you swipe it at the pharmacy, doctor's office, or medical supply store just like a regular card. Some cards require you to submit a receipt afterward to prove the expense was medical. With reimbursement, you pay out of pocket and then submit receipts to your FSA administrator to get paid back, which usually takes one to two weeks.

You can also request a check or direct deposit reimbursement. Keep all receipts and explanation of benefits documents for at least three years in case your FSA administrator asks for proof that the expense was real and may have access to. Some employers use a third-party FSA administrator like WageWorks or Conduent, so you may log into their website or app to track your balance and submit claims.

When you can change your FSA contribution

You can only change your FSA contribution during your employer's open enrollment period, which is usually once a year in the fall. Outside of open enrollment, you can make changes only if you have a may have access to life event: marriage, divorce, birth or adoption of a child, loss of health coverage, or significant change in your spouse's benefits. You must request the change within 30 to 60 days of the event, depending on your employer's rules.

If you leave your job, your FSA coverage ends, though you may be able to continue it temporarily under COBRA. Any unused balance is forfeited unless your employer allows a carryover. If you're changing jobs, ask your new employer whether they offer an FSA so you can plan your contributions accordingly.

FSA versus Health Savings Account (HSA)

An HSA is similar to an FSA but works differently. An HSA is a savings account you own, not tied to your employer, and the money rolls over year to year — there's no "use it or lose it" rule. However, you can only open an HSA if you're enrolled in a high-deductible health plan, and contribution limits are lower than FSA limits. An HSA also earns interest or investment returns, so your money can grow over time.

If your employer offers both an FSA and an HSA, you cannot contribute to both in the same year. Choose based on your situation: if you have predictable medical expenses and want to reduce taxes this year, an FSA may be better. If you want to save for long-term medical costs and have a high-deductible plan, an HSA is usually the better choice. Some people use an FSA for near-term expenses and an HSA for retirement medical costs.

What happens to your FSA if you lose your job

When you leave your job, your FSA coverage ends immediately, even if you've already contributed money for the year. You forfeit any unused balance. However, you may be able to continue your FSA under COBRA for up to 18 months, though you'll pay the full premium yourself plus an administrative fee, which is usually expensive.

A better option is to use up your FSA balance before you leave. If you know you're leaving soon, schedule medical appointments, fill prescriptions, and buy glasses or dental work before your last day. After you leave, you can open an HSA with your new employer if they offer a high-deductible plan, or you can simply pay for medical expenses with after-tax dollars. Some states offer FSA-like accounts outside of employment, but they're rare.

Frequently Asked Questions

Can I use my FSA debit card at any store?

No. FSA debit cards work only at pharmacies, doctor's offices, dental offices, and medical supply stores. They won't work at grocery stores or general retailers, even if you're buying over-the-counter medical items. Some cards require a receipt to prove the purchase was medical.

What happens if I contribute too much and don't spend it all?

The unused money is forfeited at the end of the plan year. This is why it's important to estimate conservatively. If your employer offers a grace period or carryover, you have a little more time or a small amount you can roll over, but most unused money is lost.

Can I withdraw money from my FSA for non-medical reasons?

No. FSA money is restricted to may have access to medical expenses. If you withdraw it for other reasons, you'll owe income tax on the amount plus a 20% penalty. The only exception is if you have a may have access to life event that ends your FSA coverage.

Do I need receipts to use my FSA debit card?

It depends on your plan and the merchant. Some FSA debit cards require a receipt after the purchase to verify it was medical. Others don't. Check your plan documents or call your FSA administrator to understand your plan's rules before you use the card.

Can I open an FSA if I'm self-employed?

No. FSAs are only available through employers. If you're self-employed, you cannot open an FSA. However, you may be able to open an HSA if you have a high-deductible health plan, or you can deduct medical expenses on your tax return if they exceed a certain threshold.