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 medical expenses your health insurance doesn't cover. You decide how much to contribute each year, the money comes out of your paycheck before taxes are calculated, and you use a debit card or submit receipts to get reimbursed for may be able to access costs.

The trade-off is strict: you must spend the money you set aside within the plan year, or you lose it. There is no rollover to the next year (with a narrow exception for up to $640 in 2024, depending on your plan). This is why FSAs are called "use-it-or-lose-it" accounts. You are betting on how much you will actually spend on out-of-pocket medical costs between now and December 31.

FSAs are different from Health Savings Accounts (HSAs). An HSA lets you carry money forward indefinitely and invest it for retirement. An FSA is simpler but riskier: you get the tax break only on money you actually use in that calendar year.

Key Takeaways

  • You contribute pre-tax money through your employer's payroll, reducing your taxable income for the year.
  • FSA money can pay for copays, deductibles, prescriptions, dental work, vision care, and dozens of other medical expenses that insurance does not cover.
  • Any money you do not spend by December 31 is forfeited, except for up to $640 that some plans allow to roll into the next year.
  • You can only open or change your FSA during your employer's open enrollment period, usually in the fall, unless you have a may have access to life event like a birth or job loss.

How Much You Can Contribute and When

Your employer sets the contribution limits within federal rules. For 2024, the maximum is $3,300 per year. You decide the amount during open enrollment, usually in October or November, and the contributions are deducted from each paycheck across the calendar year.

Once you choose an amount, you cannot change it unless you have a may have access to event: marriage, divorce, birth of a child, loss of health coverage, or a significant change in your spouse's benefits. A change in income alone does not may have access to. If you want to lower or raise your contribution next year, you must wait for the next open enrollment period.

The money is yours to use when ready. You do not have to wait for all contributions to be deposited before you can claim reimbursement. If you set aside $2,400 for the year and spend $500 on dental work in January, you can request reimbursement right away, even though only a few paychecks have been deducted.

What Expenses FSAs Cover

FSAs cover a long list of medical costs that your health insurance does not pay for or that you pay out of pocket. Copays, coinsurance, and deductibles all count. Prescription medications, dental work, vision care, and hearing aids are covered. So are less obvious things: over-the-counter pain relievers, allergy medicine, bandages, crutches, and even certain medical equipment like blood pressure monitors.

The IRS maintains a detailed list of may be able to access expenses. Some items surprise people: you can use FSA money for acupuncture, chiropractic care, and therapy sessions. You cannot use it for cosmetic procedures, gym memberships, or vitamins unless they treat a specific medical condition. If you are unsure whether something qualifies, your plan administrator can tell you before you spend the money.

Dependent care FSAs are a separate product that covers childcare and adult daycare costs, not medical expenses. This guide focuses on medical FSAs.

How to Use Your FSA Money

Most FSAs issue a debit card that works like a credit card at pharmacies, doctors' offices, and medical suppliers. You swipe it, and the cost is deducted from your FSA balance. No paperwork required in most cases.

For expenses the debit card cannot cover—like reimbursement from your own pocket or a provider that does not accept FSA cards—you submit a claim form with a receipt to your plan administrator. They review it, confirm it is an may be able to access expense, and send you a check or direct deposit. This usually takes one to two weeks.

Keep all receipts. Your plan administrator may ask for proof that an expense was medical and that you paid for it. If you cannot produce a receipt, the reimbursement can be denied.

The Use-It-or-Lose-It Rule and How to Plan

Money left in your FSA on December 31 is forfeited. You do not get it back, and it does not roll into next year. This is the biggest risk of an FSA: if you overestimate your medical spending, you lose the difference.

Some employers offer a grace period of up to 2.5 months into the next year to spend the previous year's money, but this is optional and not all plans include it. A few plans allow you to carry forward up to $640 of unused money, but again, this is optional. Check your plan documents to see what your employer offers.

To avoid losing money, estimate conservatively. Look at what you actually spent on out-of-pocket medical costs last year: copays, prescriptions, dental visits, vision care. Add a small buffer for unexpected costs. If you are unsure, start low. You can increase your contribution next year if you find you did not use all the money.

FSA vs. HSA: When to Choose Each

If your employer offers both an FSA and an HSA, the choice depends on your health spending and your comfort with risk. An HSA requires a high-deductible health plan (HDHP) and lets you carry money forward forever, invest it, and use it in retirement. An FSA works with any health plan and gives you a larger when ready tax break, but you must spend the money within the year.

Choose an FSA if you have predictable medical expenses each year—regular prescriptions, ongoing therapy, dental work—and you are confident you will spend what you set aside. Choose an HSA if you want to save for future medical costs or if your spending varies widely year to year and you do not want to risk losing money.

Some people have both: they contribute to an HSA for long-term savings and use an FSA for near-term, predictable costs. This is allowed as long as your employer offers both.

Common Mistakes and How to Avoid Them

The most common mistake is overestimating how much you will spend and losing money at year-end. The second is forgetting that FSA money is only available during the plan year. If you set aside $2,000 and spend it all by June, you have no FSA money left for the rest of the year, even though you are still paying premiums.

Another mistake is assuming the debit card works everywhere. Some small medical practices, independent pharmacies, and mail-order suppliers do not accept FSA cards. Always ask before you assume you can use it, or keep receipts so you can submit a claim instead.

Finally, do not assume your spouse's FSA or your HSA can cover your expenses. Each account is separate. If you are married and both work, you each have your own FSA limit, and you cannot combine them or transfer money between them.

Frequently Asked Questions

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

You lose access to the FSA when ready. Any money left in the account is forfeited. Some employers allow you to continue using the FSA through the end of the plan year under COBRA, but you must pay the full premium yourself, and this is rare for FSAs. Check with your employer's benefits department before you resign.

Can I use my FSA for my spouse or children?

Yes. FSA money can pay for medical expenses for you, your spouse, and any dependent children, regardless of whether they are covered under your health insurance plan. You do not need to be on the same insurance policy.

Does my FSA money count as taxable income?

No. The money you contribute to an FSA is deducted from your gross pay before federal income tax, Social Security tax, and Medicare tax are calculated. This reduces your taxable income and your tax bill. You do not report FSA contributions or reimbursements on your tax return.

Can I change my FSA contribution mid-year?

Only if you have a may have access to life event: marriage, divorce, birth or adoption of a child, loss of health coverage, or a significant change in your spouse's benefits. A change in income or a change of mind does not may have access to. If you want to adjust your contribution, you must wait for the next open enrollment period.

What if I submit a claim and it is denied?

Your plan administrator will tell you why. Usually it is because the expense is not on the IRS list of may be able to access costs, or you did not provide a receipt. You can appeal the decision or submit additional documentation. If the claim is truly ineligible, you cannot be reimbursed, and the money remains in your account to use on other may be able to access expenses.