What an FSA is and how the money gets there
A Flexible Spending Account (FSA) is a workplace benefit that lets you set aside pre-tax dollars to pay for medical expenses your insurance doesn't cover. Your employer deducts money from your paycheck before taxes are calculated, which lowers your taxable income for the year. You then use a debit card or submit receipts to withdraw that money and pay for may be able to access medical costs.
FSAs are offered by employers as part of their benefits package — you cannot open one on your own. During your company's open enrollment period (usually once a year), you decide how much to contribute for the coming year. That amount is divided across your paychecks and deposited into your FSA account. The money sits there until you spend it on may be able to access expenses.
The main trade-off is the 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 grace period of up to 2.5 months into the next year, or let you carry over up to $610 (the amount changes yearly), but most do not. This is why you need to estimate carefully how much you'll actually spend.
Key Takeaways
- FSA contributions come from your paycheck before taxes, which reduces the income tax and payroll taxes you owe that year.
- You can only open an FSA through your employer during open enrollment, and contribution limits change each year (currently capped at $3,300 for 2024).
- Money not spent by the end of the plan year is forfeited unless your plan offers a grace period or carryover option.
- may be able to access expenses include copays, deductibles, prescription medications, dental work, vision care, and some over-the-counter items with a prescription.
- You access the money using an FSA debit card or by submitting receipts for reimbursement.
What you can and cannot buy with FSA money
FSA funds cover a specific list of medical expenses defined by the IRS. may be able to access items include copays and coinsurance, deductibles, prescription medications, insulin, dental cleanings and fillings, orthodontia, vision exams and glasses, contact lenses, hearing aids, and certain over-the-counter medications (but only if you have a prescription from your doctor). You can also use FSA money for medical equipment like crutches, wheelchairs, and blood pressure monitors.
Items you cannot buy with FSA money include cosmetic procedures, gym memberships, vitamins (unless prescribed for a specific condition), toothpaste, sunscreen, and general wellness products. Health insurance premiums themselves are not may be able to access, though you can use FSA money to pay the out-of-pocket costs that come after insurance. Childcare and dependent care are handled through a separate account called a Dependent Care FSA, which has its own rules and limits.
The IRS list of may be able to access expenses is long and sometimes counterintuitive — for example, some over-the-counter pain relievers are may be able to access if you have a prescription, but others are not. If you are unsure whether something qualifies, ask your FSA plan administrator or check the IRS Publication 502 before you spend the money.
How to use your FSA and track spending
Most FSAs issue a debit card that you can swipe at pharmacies, doctor's offices, and other medical providers. The card is linked to your FSA balance, and the transaction is deducted immediately. Some providers will ask you to verify that the purchase is for an may be able to access expense — this is called substantiation, and you may need to provide a receipt or explanation.
If your FSA does not issue a debit card, or if you pay out of pocket, you can request reimbursement by submitting receipts and a claim form to your plan administrator. This process typically takes one to two weeks. Keep all receipts and documentation for at least three years in case your plan administrator audits your account.
Your FSA plan administrator (often a third-party company hired by your employer) will send you a statement each month or quarter showing your balance, contributions, and spending. Log into your account online or call the number on your FSA card to check your balance before making a purchase, so you do not overspend and lose money to the use-it-or-lose-it rule.
FSA vs. HSA: which account is right for you
If your employer offers both an FSA and a Health Savings Account (HSA), you need to choose one — you cannot have both in the same year. The main difference is that HSA money rolls over year to year and grows like a savings account, while FSA money must be spent or lost. HSAs also require you to be enrolled in a high-deductible health plan, whereas FSAs work with any insurance plan.
An FSA makes sense if you know you will have medical expenses this year and want to lower your taxes now. An HSA makes sense if you want to save for future medical costs and have the flexibility to invest the money. If your employer contributes to an HSA on your behalf, that is usually the better deal — assistance programs is hard to turn down.
Some employers offer both accounts but limit how much you can contribute to each, or require you to choose. Read your benefits guide carefully, or ask your HR department which option fits your situation.
What happens to unused FSA money
At the end of the plan year, any money left in your FSA account is forfeited and returned to your employer. This is the use-it-or-lose-it rule, and it applies to most FSA plans. However, some employers offer a grace period of up to 2.5 months into the next calendar year, which gives you extra time to spend the money. Other plans allow you to carry over up to $610 (for 2024) into the next year, though not both options at once.
Because of this rule, many people spend down their FSA balance in November and December on predictable expenses like glasses, dental work, or a year's supply of prescription medications. If you are unsure whether your plan has a grace period or carryover, check your plan documents or ask your HR department before the year ends.
If you leave your job, you typically have 60 days to submit claims for expenses you incurred while employed, even if you no longer work there. After that window closes, any remaining balance is forfeited. This is another reason to keep receipts and file claims promptly.
How FSA contributions affect your taxes
The money you contribute to an FSA is deducted from your paycheck before federal income tax, Social Security tax, and Medicare tax are calculated. This means you pay less in taxes overall. For example, if you contribute $2,000 to an FSA and your combined tax rate is 25 percent, you save $500 in taxes that year.
This tax savings is one of the main reasons to use an FSA, even though you risk losing money to the use-it-or-lose-it rule. The tax break is automatic — you do not need to do anything special on your tax return. Your employer reports your FSA contributions on your W-2 form, and the IRS already accounts for them.
The downside is that if you contribute more than you spend, you lose the money and the tax savings that came with it. This is why estimating your annual medical expenses carefully is important. If you are unsure, contribute a smaller amount and adjust next year.
Common mistakes and how to avoid them
The biggest mistake is overestimating how much you will spend and losing money to the use-it-or-lose-it rule. To avoid this, track your medical spending from the past year and add a small buffer for unexpected costs. If you have a chronic condition or take regular medications, your spending is easier to predict. If your medical needs are unpredictable, contribute a smaller amount.
Another common mistake is not knowing which items are may be able to access. Over-the-counter medications are a frequent source of confusion — some are may be able to access with a prescription, others are not. Before you buy something, check with your plan administrator or look it up in IRS Publication 502. Do not assume that because something is sold at a pharmacy, it is FSA-may be able to access.
A third mistake is losing receipts or not submitting claims in time. If you use the FSA debit card, keep the receipt anyway — your plan administrator may ask for proof that the purchase was for an may be able to access expense. If you pay out of pocket, submit your claim within the deadline your plan sets, which is usually 60 to 90 days after the expense. After that, you may not be able to get reimbursed.
Frequently Asked Questions
Can I use my FSA for my spouse or children?
Yes, you can use FSA money to pay for medical expenses for your spouse and dependents, even if they are not covered under your health insurance plan. The expense must be may be able to access under IRS rules, and you must have receipts to prove it. You cannot use FSA money to pay for someone else's health insurance premium, but you can use it for their copays, medications, and medical equipment.
What if I change jobs mid-year?
Your FSA ends when you leave your job, and you forfeit any unused balance. However, you have 60 days to submit claims for expenses you incurred while employed. If your new employer offers an FSA, you can enroll during your new company's open enrollment period or within 30 days of your hire date if they allow it. You cannot transfer money from your old FSA to a new one.
Can I withdraw money from my FSA without a receipt?
It depends on your plan. Some FSAs use a debit card that does not require a receipt at the point of sale, but the plan administrator may ask for proof later. Other plans require you to submit a receipt and claim form before you get reimbursed. Check your plan documents or call your plan administrator to understand what documentation they need.
What if I spend more than my FSA balance?
You cannot spend more than the money in your account. If you try to use your FSA debit card when your balance is zero, the transaction will be declined. This is why checking your balance before making a purchase is important. If you need more money for medical expenses, you will have to pay out of pocket or use another payment method.
Can I change my FSA contribution amount during the year?
No, you cannot change your contribution amount outside of open enrollment unless you have a may have access to life event, such as marriage, divorce, birth of a child, loss of health insurance, or a significant change in your medical needs. If you experience a may have access to event, you typically have 30 to 60 days to make changes. Contact your HR department to find out what counts as a may have access to event at your company.