What an FSA is and how it differs from an HSA

A Flexible Spending Account (FSA) is a workplace account where you set aside pre-tax money to pay for medical expenses your insurance doesn't cover. Your employer takes the money directly from your paycheck before taxes are calculated, which lowers your taxable income for the year.

The main difference between an FSA and an HSA is who owns the account and what happens to unused money. With an FSA, your employer owns the account and sets the rules. With an HSA, you own the account and can carry the balance forward year to year. An FSA also has a "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. An HSA has no expiration date on your balance.

You don't need a high-deductible health plan to have an FSA, unlike an HSA. This makes FSAs available to more people, but it also means the account is simpler and less flexible in some ways.

Key Takeaways

  • An FSA lets you set aside pre-tax money from your paycheck to pay for medical costs, reducing the amount of income tax you owe.
  • Money you don't spend by the end of the plan year is forfeited, so you need to estimate carefully how much you will use.
  • You can use FSA money for copays, deductibles, prescription medications, and some over-the-counter items, but not for health insurance premiums or cosmetic procedures.
  • Your employer sets up and manages the FSA, and you enroll during your company's open enrollment period, usually once per year.
  • If you leave your job, you typically have 60 days to spend remaining FSA funds or lose them.

How much you can set aside each year

The IRS sets a maximum amount you can contribute to an FSA each year. This limit changes annually. For 2024, the limit is $3,200 per person. Your employer may set a lower limit, but cannot exceed the IRS maximum.

You choose your contribution amount during your company's open enrollment period, which usually happens once a year in the fall. The amount you choose is divided equally across your paychecks for the rest of the year. If you enroll mid-year, the amount is divided among the remaining paychecks.

Choosing the right amount is the hardest part of having an FSA. If you set aside too much, you lose the unspent balance. If you set aside too little, you pay for medical expenses with after-tax dollars. Most people estimate based on what they spent the previous year, plus any planned expenses like dental work or vision appointments they know are coming.

What you can and cannot buy with FSA money

You can use FSA funds to pay for many medical expenses that your insurance does not cover or only partially covers. This includes copays and coinsurance (the percentage you pay after insurance), deductibles, prescription medications, and some over-the-counter items like pain relievers, allergy medicine, and first-aid supplies.

You can also use FSA money for dental work, vision care, hearing aids, and mental health treatment. The IRS publishes a detailed list of approved expenses on its website, and your FSA plan administrator can tell you whether a specific item qualifies.

You cannot use FSA money for health insurance premiums, cosmetic procedures (like teeth whitening or Botox), or general wellness items like vitamins or gym memberships. You also cannot use it for over-the-counter medications that do not require a prescription, with a few exceptions like insulin.

How to use your FSA and access the money

Your employer gives you an FSA debit card or reimburses you for expenses you pay out of pocket. With a debit card, you swipe it at the pharmacy, doctor's office, or medical supply store just like a regular card. The money comes directly from your FSA balance.

If you pay for medical expenses yourself, you submit a receipt and a claim form to your FSA plan administrator, and they reimburse you within a few weeks. Keep all receipts and documentation in case the plan administrator asks for proof that the expense was medical.

Some employers use a "substantiation" process where the plan administrator randomly checks receipts to make sure money is being spent on may be able to access expenses. This is normal and not a sign of a problem.

The "use it or lose it" rule and what happens to leftover money

At the end of each plan year, any money left in your FSA goes back to your employer. You cannot carry it forward to the next year, and you cannot withdraw it as cash. This is called the "use it or lose it" rule, and it is the biggest drawback of an FSA compared to an HSA.

Some employers offer a "grace period" of up to 2.5 months after the plan year ends, during which you can still spend your previous year's FSA balance. A few employers also offer a "carryover" option that lets you keep up to $640 (in 2024) of unspent money. Ask your employer whether your plan includes either of these options.

If you leave your job, you typically have 60 days to spend any remaining FSA balance. After that, the money is forfeited. This is another reason to be conservative when choosing how much to set aside.

When you can enroll and make changes

You enroll in an FSA during your company's open enrollment period, which usually happens once a year in the fall. If you are a new employee, you may be able to enroll within 30 days of your hire date. If you miss open enrollment, you cannot enroll until the next year unless you have a may have access to life event.

A may have access to life event is a major change in your life that lets you enroll or change your FSA election outside of open enrollment. Examples include getting married, having a baby, losing health coverage, or a significant change in your spouse's health plan. You usually have 30 to 60 days after the event to make changes.

If you do not enroll during open enrollment and do not have a may have access to life event, you will not have an FSA for that year. You cannot go back and enroll retroactively.

FSA vs. HSA: which one is right for you

An FSA makes sense if you have predictable medical expenses each year and want to lower your taxes. If you know you will spend $2,000 on copays, prescriptions, and dental work, an FSA lets you set that money aside before taxes, saving you several hundred dollars depending on your tax bracket.

An HSA makes more sense if you want to save money long-term, have a high-deductible health plan, or are not sure how much you will spend. With an HSA, you keep the balance year to year and can invest it, so it grows over time. You also do not lose unspent money.

Some people have both an FSA and an HSA if their employer offers both. You cannot use FSA money and HSA money for the same expense, but you can use them for different expenses in the same year. This is rare, but it is allowed.

Frequently Asked Questions

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

You have 60 days after you leave to spend any remaining balance. After that, the money goes back to your employer and you lose access to it. Some employers let you continue the FSA through COBRA, which extends your coverage but requires you to pay the full premium yourself.

Can I use my FSA debit card at any store?

No. FSA debit cards only work at pharmacies, doctor's offices, dental offices, and other medical providers. They will not work at grocery stores or general retailers, even if those stores sell over-the-counter medical items.

What if I spend less than I set aside?

The unspent money goes back to your employer at the end of the plan year. Some employers offer a grace period or carryover option that lets you keep a small amount, so ask your employer about this. Otherwise, you lose the money, which is why estimating carefully is important.

Can I change my FSA contribution mid-year?

Only if you have a may have access to life event like a marriage, birth, or loss of coverage. You cannot change your election just because you realize you set aside too much or too little. This is another reason to think carefully about your amount during open enrollment.

Do I need to submit receipts for every FSA purchase?

Not always. If you use an FSA debit card, the transaction is recorded automatically. However, your plan administrator may ask you to provide receipts later to verify that the expense was medical. Keep all receipts for at least three years.