What an FSA is and how the money gets there

A Flexible Spending Account (FSA) is a tax-advantaged savings account you set up through your employer. You decide how much money to set aside from your paycheck before taxes are taken out, and that money sits in the account waiting for you to spend it on medical and dependent care costs. The employer does not contribute — the money comes entirely from your salary, but because it comes out before federal income tax and Social Security tax, you pay less in taxes overall.

You choose your FSA contribution amount once a year during your employer's open enrollment period, usually in the fall. The money is deducted from your paycheck in equal amounts throughout the year. Most employers offer two types: a medical FSA (for healthcare costs) and a dependent care FSA (for childcare or adult dependent care). You can have both at the same time, but they have separate contribution limits and separate rules about what you can spend the money on.

The account is managed by a third-party administrator your employer contracts with — companies like HealthEquity, WageWorks, or Conduent. You get a debit card or reimbursement forms to access the money when you need it.

Key Takeaways

  • An FSA lets you set aside pre-tax money from your paycheck for medical expenses or dependent care, which reduces your taxable income and the taxes you owe.
  • You must choose your FSA contribution amount during your employer's open enrollment period, and you cannot change it mid-year unless you have a may have access to life event like a birth or job loss.
  • Medical FSAs have a contribution limit (which varies by year), and dependent care FSAs have a separate lower limit; money left over at the end of the year is forfeited under the "use-it-or-lose-it" rule.
  • You can spend FSA money on IRS-approved medical expenses like copays, deductibles, prescriptions, and dental work, but not on health insurance premiums or cosmetic procedures.
  • You access the money through a debit card, online portal, or by submitting receipts for reimbursement to your plan administrator.

What you can and cannot buy with FSA money

The IRS publishes a list of approved medical expenses you can pay for with a medical FSA. Common ones include copays and coinsurance, deductibles, prescription medications, insulin, dental work (fillings, crowns, orthodontics), vision care (glasses, contacts, exams), hearing aids, and over-the-counter items like pain relievers, allergy medicine, and first-aid supplies. You can also use it for mental health counseling, physical therapy, and medical equipment like crutches or blood pressure monitors.

You cannot use a medical FSA for health insurance premiums, cosmetic procedures (like teeth whitening or Botox), gym memberships, vitamins (unless prescribed by a doctor), or over-the-counter items that are not medical in nature. If you are unsure whether something qualifies, your plan administrator can tell you before you spend the money.

A dependent care FSA works differently. You can only use it to pay for childcare, preschool, after-school care, or care for an adult dependent (like an aging parent) so that you or your spouse can work. You cannot use it for school tuition, summer camp, or babysitting for social events. The money must go to a care provider, not to a family member you live with.

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

Money left in your FSA at the end of the calendar year is forfeited — you cannot roll it over to the next year or take it out. This is called the use-it-or-lose-it rule, and it is a hard deadline. If you contribute $2,500 to a medical FSA and only spend $1,800 by December 31, the remaining $700 is gone.

Because of this rule, you need to estimate carefully how much you will actually spend in the coming year. Look at your medical bills from the past year, factor in any planned procedures or dental work, and be conservative. It is better to contribute less and not use all of it than to contribute too much and lose money.

Some employers offer a grace period of up to 2.5 months into the next year to spend down your FSA balance, or they offer a carryover of up to $610 (the amount changes yearly) to the next year. Check your plan documents to see if your employer offers either option. If they do, you have a little more flexibility, but you should still not count on it.

How to access your FSA money and submit claims

Most FSAs come with a debit card linked to your account. You can use it at pharmacies, doctor offices, and medical suppliers just like a regular debit card. The card is typically set up to only work at merchants that sell medical or dependent care services, so you cannot accidentally use it at a grocery store or gas station.

If you do not have a debit card or the merchant does not accept it, you can pay out of pocket and then submit a claim for reimbursement. You will need to provide a receipt showing what you bought, the date, the amount, and proof that it is an approved expense. Your plan administrator has an online portal or mobile app where you can upload receipts and request reimbursement. Most reimburse within 5 to 10 business days.

Keep all receipts and documentation for at least three years. The IRS can audit FSA claims, and you need to be able to prove that the money was spent on approved expenses.

When you can change your FSA contribution and what happens when you leave your job

You can only change your FSA contribution amount during your employer's open enrollment period, which is usually once a year. If you have a may have access to life event — such as a birth, adoption, marriage, divorce, death of a spouse or dependent, significant change in childcare costs, or loss of health coverage — you can make changes outside of open enrollment. You typically have 30 to 60 days from the event to notify your employer and your plan administrator.

If you leave your job, your FSA ends. You have until the end of the calendar year to spend any remaining balance, but once you are no longer employed there, you cannot add more money to the account. If you have money left over, it is forfeited. Some employers allow you to continue using your FSA for a limited time after you leave (called COBRA continuation), but this is rare and you would have to pay the full cost of the premiums yourself.

If you move to a new job with a different employer, you cannot transfer your FSA balance. You start fresh with a new FSA at your new employer during their open enrollment period. This is another reason to spend down your FSA before you leave a job.

FSA versus HSA: which one you might have

An FSA and an HSA (Health Savings Account) are both tax-advantaged accounts, but they work differently. An FSA is offered by your employer and has a use-it-or-lose-it rule. An HSA is tied to a high-deductible health plan, can be carried over year to year, and you own it — you can take it with you if you change jobs. You cannot have both an FSA and an HSA at the same time, though you can have a dependent care FSA and an HSA together.

If your employer offers both, an HSA is usually the better long-term choice because the money rolls over and you can invest it. But if your employer only offers an FSA, or if you prefer to use your medical money each year rather than save it, an FSA works well for predictable annual expenses like prescriptions, copays, and dental work.

Frequently Asked Questions

Can I use my FSA debit card at any pharmacy or doctor's office?

Most pharmacies and medical providers accept FSA debit cards, but not all. The card is programmed to only work at merchants that sell medical or dependent care services. If a merchant does not accept it, you can pay out of pocket and submit a receipt for reimbursement instead.

What happens to my FSA money if I do not spend it by the end of the year?

Money left in your FSA at the end of the calendar year is forfeited. Some employers offer a grace period (up to 2.5 months into the next year) or a carryover (up to $610), but this is optional. Check your plan documents to see if your employer offers either option.

Can I change my FSA contribution amount if my situation changes mid-year?

You can only change your contribution outside of open enrollment if you have a may have access to life event, such as a birth, marriage, divorce, or loss of health coverage. You typically have 30 to 60 days to notify your employer and plan administrator. A simple change in income or medical expenses does not may have access to.

What happens to my FSA if I quit my job or get laid off?

Your FSA ends when you leave your employer. You can spend any remaining balance through the end of the calendar year, but you cannot add more money. Any balance left over after December 31 is forfeited. Some employers offer COBRA continuation, which lets you keep the FSA for a limited time, but you pay the full premium yourself.

Can I have both an FSA and an HSA at the same time?

You cannot have a medical FSA and an HSA at the same time — the IRS does not allow it. However, you can have a dependent care FSA and an HSA together, since they cover different types of expenses.