What a Flexible Spending Account Is

A Flexible Spending Account (FSA) is a way to set aside pre-tax money from your paycheck to pay for medical costs that your insurance doesn't cover. You decide how much to contribute each year, your employer takes that amount out before taxes are calculated, and you use a debit card or submit receipts to get reimbursed for may be able to access expenses.

The main difference between an FSA and an HSA is timing and flexibility. An FSA is tied to your job — you can only open one if your employer offers it, and you lose any money you don't spend by the end of the year (with a small exception explained below). An HSA, by contrast, stays with you even if you change jobs, and the money rolls over forever. Both reduce your taxable income, but they work in different ways.

Key Takeaways

  • An FSA lets you set aside pre-tax money from your paycheck to pay for medical expenses, reducing the amount of income tax you owe.
  • You choose how much to contribute each year during your employer's open enrollment period, and that amount is locked in unless you have a may have access to life change.
  • Money you don't spend by the end of the plan year is forfeited — you cannot carry it over to the next year, though a small grace period or carryover option may be available depending on your plan.
  • FSA funds cover many out-of-pocket medical costs: copays, deductibles, prescription drugs, dental work, vision care, and medical equipment like crutches or hearing aids.
  • You access the money through a debit card issued by your plan administrator, or by paying out of pocket and submitting receipts for reimbursement.

How Much You Can Contribute

Each year, you decide how much to contribute to your FSA during your employer's open enrollment period — usually in the fall for coverage starting January 1st. The amount comes out of your paycheck in equal installments throughout the year, before federal income tax and Social Security tax are calculated.

The IRS sets a maximum contribution limit that changes slightly each year. For 2024, the limit is $3,200 per year for individual coverage. If you have family coverage through your employer, you and your spouse can each contribute up to that limit if you both have access to an FSA through your jobs. Check with your employer's benefits office for the current year's limit and your plan's specific rules.

The key decision is guessing how much you will actually spend on may be able to access medical costs in the coming year. If you overestimate, you lose the extra money. If you underestimate, you pay for those costs with after-tax dollars. Many people start by looking at what they spent the previous year on copays, prescriptions, and other out-of-pocket costs.

What You Can and Cannot Buy With FSA Money

FSA funds cover a wide range of medical expenses that your insurance doesn't pay for. This includes copays and coinsurance (your share of the cost after insurance pays), deductibles, prescription medications, dental work like fillings and cleanings, vision care including glasses and contact lenses, and medical equipment like crutches, wheelchairs, and hearing aids. You can also use FSA money for over-the-counter medications if you have a prescription from your doctor — this changed in 2020, so older guidance may say otherwise.

What you cannot buy includes health insurance premiums, cosmetic procedures, vitamins (unless prescribed by a doctor for a specific condition), and most wellness items. Gym memberships and weight-loss programs are not covered. If you are unsure whether something qualifies, ask your plan administrator before you spend the money — they can give you a written answer that protects you if the IRS ever questions it.

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

The biggest risk with an FSA is the use-it-or-lose-it rule: any money you don't spend by the end of the plan year is forfeited. You cannot roll it over to next year, and you cannot get it back as a refund. This is why many people contribute conservatively — they would rather pay taxes on the money than lose it entirely.

However, your employer's plan may offer one or both of these options to soften the impact. A grace period gives you an extra 2.5 months (usually through March 15th) to spend money from the previous year's account. A carryover option lets you roll up to $640 (in 2024) of unused funds into the next year. Not all employers offer these, and they cannot be combined — your plan has one or the other, or neither. Check your plan documents or ask your benefits office which option, if any, applies to you.

How to Use Your FSA Money

Most FSA plans issue you a debit card that you can use at pharmacies, doctor's offices, and medical suppliers. When you swipe it, the plan administrator deducts the amount from your FSA balance. Some merchants may ask for a receipt or explanation of benefits to confirm the purchase is may be able to access — keep these documents in case you need to prove the expense later.

If your plan does not issue a debit card, or if you prefer to pay out of pocket, you can submit receipts and a claim form to your plan administrator for reimbursement. This takes longer — usually one to two weeks — but gives you a paper trail. Some plans let you submit claims online through a website or mobile app, which speeds up the process.

Keep all receipts and explanations of benefits for at least three years. The IRS can audit FSA claims, and you need to prove that the money went toward may be able to access expenses. If you cannot produce documentation, you may have to repay the tax benefit you received.

When Your FSA Ends

Your FSA coverage is tied to your job. If you leave your employer, your FSA ends, and you have a limited time — usually 60 to 90 days — to submit claims for expenses you already incurred. Any unused balance is forfeited; you cannot transfer it to a new employer's plan or to an HSA.

If you are laid off or your hours are cut, you may be able to continue your FSA coverage under COBRA (the Consolidated Omnibus Budget Reconciliation Act), though you will pay the full premium yourself plus an administrative fee. This is usually expensive and makes sense only if you have significant medical expenses planned for the rest of the year.

If you change jobs and your new employer offers an FSA, you can open a new account and start contributing when ready. The two accounts are separate — money from your old FSA does not transfer over.

FSA vs. HSA: Which Makes Sense for You

An FSA is better than an HSA if you have predictable medical expenses each year and want to reduce your taxes now. You know roughly what you will spend, you can set aside that amount, and you save on taxes without worrying about whether the money will still be there in five years.

An HSA is better if you want to keep the money long-term, change jobs frequently, or are not sure how much you will spend. HSA money rolls over forever, so there is no pressure to spend it by December 31st. You can also invest HSA funds in stocks and bonds, turning it into a retirement savings tool.

Some people have access to both — for example, if your employer offers an FSA and you also have a high-deductible health plan that qualifies for an HSA. In that case, you can contribute to both in the same year, as long as you do not exceed the combined limits. Many people use an FSA for predictable costs (like monthly prescriptions) and an HSA for unexpected expenses or long-term savings.

Frequently Asked Questions

What happens to my FSA money if I don't spend it by December 31st?

You lose it — the money is forfeited and goes back to your employer. However, if your plan offers a grace period, you have until mid-March to spend the previous year's balance. If your plan offers a carryover option, you can roll up to $640 into the next year. Check your plan documents to see which option applies to you.

Can I change my FSA contribution amount during the year?

Only if you have a may have access to life change: marriage, divorce, birth of a child, loss of other health coverage, or a significant change in your medical needs. A job change or a change in your employer's plan also qualifies. You cannot change your contribution just because you want to — you have to wait for open enrollment in the fall.

Can I use my FSA debit card for anything besides medical expenses?

No. The card is restricted to may be able to access medical expenses. If you try to use it for something that does not may have access to, the transaction will be declined. Some merchants may also require a receipt or explanation of benefits to verify the purchase is may be able to access.

What if I move to a different state — does my FSA still work?

Yes. Your FSA is tied to your employer, not your state. As long as you work for the same employer, your FSA continues to work the same way, even if you relocate. If you change jobs, your FSA ends and you have a limited time to submit final claims.

Can I use FSA money for my spouse or children?

Yes, as long as they are covered under your health insurance plan. You can use your FSA to pay for their copays, prescriptions, dental work, and other may be able to access expenses. You cannot use it for family members who are not on your insurance.