What a Flexible Spending Account Is

A Flexible Spending Account (FSA) is a workplace benefit that lets you set aside pre-tax money to pay for healthcare costs your insurance doesn't cover. You decide how much to contribute each year, and that money comes out of your paycheck before taxes are calculated. When you need to pay for a covered expense—copays, deductibles, prescription glasses, dental work—you use your FSA card or submit a receipt for reimbursement.

The main advantage is the tax savings. If you contribute $2,500 to an FSA and your tax rate is 25 percent, you save roughly $625 in federal taxes that year. The money you don't spend on healthcare stays in the account and can be used later in the same year, though there are strict rules about what happens to unused funds.

FSAs are offered by employers, not by the government or insurance companies. Your employer sets up the plan, and you enroll during open enrollment—usually once a year. Not all employers offer FSAs, so check with your HR or benefits department to see if one is available to you.

Key Takeaways

  • An FSA lets you contribute pre-tax money through your paycheck to pay for healthcare expenses your insurance doesn't cover, saving you money on federal taxes.
  • You choose your contribution amount during open enrollment, and that amount is locked in for the entire year unless you have a may have access to life event.
  • FSAs cover copays, deductibles, prescription medications, glasses, dental work, and many other out-of-pocket healthcare costs, but not health insurance premiums.
  • Money left unspent at the end of the year is forfeited under the "use-it-or-lose-it" rule, though some employers offer a grace period or carryover option.
  • You access FSA funds through a debit card, reimbursement request, or direct payment to providers, depending on how your employer's plan is set up.

How Much You Can Contribute and When

The IRS sets an annual limit on FSA contributions. For 2024, the limit is $3,200 per year. This limit changes occasionally, so check with your benefits administrator for the current year's cap. You decide how much to contribute within that limit, and the amount is deducted from your paycheck in equal installments throughout the year.

You can only change your FSA contribution during open enrollment, which is usually in the fall for benefits that start January 1. If 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 childcare costs—you can change your contribution mid-year. Your employer's HR department can tell you which events may have access to and how to request a change.

Once you choose an amount, you're committed to that contribution for the entire year. If you contribute $2,500 but only spend $1,200, the remaining $1,300 is typically lost at the end of the year. This is the "use-it-or-lose-it" rule, and it's the biggest risk of an FSA. Some employers offer a grace period (usually 2.5 months into the next year) or allow you to carry over up to $640 to the next year, but this varies by plan.

What Expenses an FSA Covers

FSAs cover a wide range of out-of-pocket healthcare costs. Copays and coinsurance (your share of the cost after insurance pays) are covered. Deductibles—the amount you pay before insurance kicks in—are covered. Prescription medications, including birth control, are covered. Dental work, including cleanings, fillings, and orthodontia, is covered. Vision care, including eye exams, glasses, and contact lenses, is covered.

Other covered expenses include hearing aids, medical equipment like crutches or blood pressure monitors, mental health counseling, physical therapy, and over-the-counter medications if you have a prescription from a doctor. Insulin and other diabetes supplies are covered. Acupuncture, chiropractic care, and certain other alternative treatments are covered if a doctor prescribes them.

FSAs do not cover health insurance premiums, including premiums for your employer's plan or a spouse's plan. They do not cover cosmetic procedures like teeth whitening or Botox. They do not cover gym memberships or general wellness programs, though some preventive care is covered at no cost under your insurance. If you're unsure whether a specific expense is covered, ask your FSA administrator or check the plan document your employer provided.

How to Use Your FSA Money

Most employers issue an FSA debit card that works like a regular debit card at pharmacies, doctor's offices, and other healthcare providers. You swipe it at checkout, and the cost is deducted from your FSA balance. Some providers, especially smaller offices, may not accept FSA cards, in which case you pay out of pocket and submit a receipt for reimbursement.

To request reimbursement, you typically log into your FSA account online or call the FSA administrator and submit a claim. You'll need to provide a receipt or explanation of benefits (EOB) from your insurance showing the date of service, the provider's name, the amount you paid, and what the expense was for. The FSA administrator reviews the claim to make sure it's for a covered expense, and if it is, they reimburse you within a few days to a few weeks.

Keep all receipts and documentation for at least three years. The IRS can audit FSA claims, and you need proof that the money was spent on covered healthcare expenses. If you can't provide documentation, you may have to repay the reimbursement and owe taxes on it.

The Use-It-or-Lose-It Rule and Your Options

At the end of the calendar year, any money left in your FSA is forfeited. You cannot roll it over to the next year, and you cannot withdraw it as cash. This rule exists because FSAs are funded with pre-tax money, and the IRS does not allow you to carry over unused pre-tax healthcare funds indefinitely.

Some employers offer a grace period, which gives you an extra 2.5 months (usually through March 15) to spend money from the previous year's FSA. Other employers offer a carryover option, which allows you to carry up to $640 of unused FSA money into the next year. A few employers offer both. Check your plan document or ask your HR department which option, if any, your employer provides.

Because of the use-it-or-lose-it rule, it's important to estimate your healthcare expenses carefully before you contribute. If you know you'll need glasses, dental work, or prescription refills in the coming year, factor those costs in. If you're unsure, contribute a smaller amount to be safe. You can always contribute more next year if you didn't use all your money.

FSA vs. HSA: Key Differences

FSAs and HSAs are both tax-advantaged accounts for healthcare, but they work differently. An FSA is offered by your employer and is tied to your job. If you leave your job, your FSA ends, and you lose any unused money. An HSA is owned by you, not your employer, and you keep it even if you change jobs. HSA money rolls over year to year and can be invested, making it more like a savings account.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). FSAs have no insurance requirement—you can have an FSA with any type of health plan your employer offers. HSAs have higher annual contribution limits than FSAs. In 2024, you can contribute up to $4,150 to an individual HSA or $8,300 to a family HSA, compared to $3,200 for an FSA.

The main trade-off is flexibility. An HSA is better if you want money to carry over and grow over time. An FSA is better if you have predictable healthcare expenses each year and want to maximize your tax savings now. Some employers offer both, and you can contribute to both in the same year as long as you meet the HSA requirements.

Common Mistakes to Avoid

The biggest mistake is overestimating how much you'll spend and losing money at the end of the year. Be conservative with your estimate. If you're not sure, start with a smaller contribution and increase it next year if you didn't use all your money.

Another mistake is forgetting to submit receipts for reimbursement. If you use your FSA card, the transaction is usually tracked automatically. But if you pay out of pocket and need to be reimbursed, you have to submit the receipt yourself. Missing the deadline to submit can mean you don't get reimbursed, and the money is forfeited.

A third mistake is assuming all healthcare expenses are covered. Cosmetic procedures, gym memberships, and certain over-the-counter items without a prescription are not covered. Check the plan document or call your FSA administrator before you spend money on something you're unsure about.

Finally, don't forget to re-enroll each year. If you don't actively choose to contribute during open enrollment, your FSA ends, and you won't have the account the following year. Mark your calendar for open enrollment and make your decision before the deadline.

Frequently Asked Questions

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

Your FSA ends when you leave your job. Any unused money is forfeited—you cannot take it with you or roll it into a new employer's FSA. However, you may be able to continue coverage through COBRA for a limited time, which would let you use remaining FSA funds. Check with your employer's benefits department about COBRA may be able to access.

Can I use my FSA for my spouse or children?

Yes. You can use your FSA to pay for healthcare expenses for yourself, your spouse, and your dependents, including children. The money doesn't have to be spent on the person who is enrolled in the plan—it can be used for any family member's covered healthcare costs.

Do I need receipts to use my FSA card?

When you swipe your FSA card at a pharmacy or doctor's office, the transaction is usually tracked automatically and you don't need to submit a receipt. However, some FSA administrators may ask for documentation later to verify the expense was covered. Keep receipts for at least three years in case you're asked to provide proof.

Can I change my FSA contribution mid-year?

You can only change your contribution if you have a may have access to life event, such as marriage, divorce, birth of a child, or loss of other health coverage. Routine changes are only allowed during open enrollment. Contact your HR department to learn about your situation qualifies for a mid-year change.

What if I contribute to an FSA but don't use all the money?

Unused FSA money is forfeited at the end of the year under the use-it-or-lose-it rule. Some employers offer a grace period or carryover option that lets you use the money into the next year, but this varies by plan. Check your plan document to see if your employer offers either option.