What a healthcare reimbursement account is

A healthcare reimbursement account is a tax-advantaged savings account that your employer sets up for you, funded with money you contribute before taxes are taken out of your paycheck. You use it to pay for medical expenses that your health insurance doesn't cover—copays, deductibles, dental work, vision care, hearing aids, and certain over-the-counter items. The money you put in reduces your taxable income for the year, which means you pay less in federal income tax and payroll taxes.

The most common type is a Flexible Spending Account (FSA), which is offered through your employer's benefits plan. A smaller number of employers offer a Health Reimbursement Arrangement (HRA), which works differently because the employer funds it, not you. Both let you set aside money specifically for healthcare costs and get a tax break in the process.

The catch is that these accounts have strict rules about what you can spend the money on, when you can access it, and what happens to unused funds. Understanding those rules before you sign up prevents you from losing money or facing unexpected tax bills.

Key Takeaways

  • Healthcare reimbursement accounts let you set aside pre-tax money for medical expenses your insurance doesn't cover, reducing your annual tax bill.
  • FSAs are funded by you through payroll deductions; HRAs are funded by your employer, and the rules for each are different.
  • You can only change your FSA contribution during open enrollment or after a may have access to life event like marriage or job loss of coverage.
  • FSA funds you don't use by the end of the plan year are forfeited—there is no rollover to the next year, though some plans offer a short grace period.
  • You must submit receipts or invoices to prove expenses are may be able to access before the account reimburses you.

How FSAs and HRAs differ

An FSA is funded entirely by you through pre-tax payroll deductions. You decide how much to contribute each year during your employer's open enrollment period, and that money is set aside in your account. You then submit claims with receipts to get reimbursed for may be able to access medical expenses. If you don't use the money by the end of the plan year, it is forfeited—you lose it. Some employers offer a grace period of up to 2.5 months into the next year to spend remaining funds, but this is optional and not all plans include it.

An HRA is funded by your employer, not you. Your employer decides how much to contribute to your account each year, and you don't make payroll deductions. HRAs are more flexible: unused funds can roll over to the next year, and some employers allow you to carry over a large balance indefinitely. HRAs are less common than FSAs and are typically offered by larger employers. The tax advantage is the same—the money is not taxed as income to you—but the funding and carryover rules are completely different.

Both accounts require you to submit documentation (receipts, invoices, or explanation of benefits) to prove that an expense is may be able to access before you get reimbursed. Both are tied to your employer, so if you leave your job, you lose access to any remaining balance in an FSA, though some HRAs allow you to continue coverage under COBRA.

What expenses may have access to for reimbursement

The IRS maintains a list of may be able to access medical expenses, and it is broader than many people expect. Copays, coinsurance, and deductibles all may have access to. So do prescription medications, dental work (fillings, crowns, orthodontia), vision care (glasses, contacts, exams), hearing aids, and certain medical equipment like crutches, wheelchairs, and blood pressure monitors.

Over-the-counter items are may be able to access only if you have a prescription from a doctor—a bottle of ibuprofen from the shelf does not may have access to, but ibuprofen prescribed by your doctor does. Insulin is an exception: you can buy it over the counter without a prescription and still use FSA funds. Menstrual products became may be able to access in 2021.

Expenses that do not may have access to include cosmetic procedures (unless medically necessary), gym memberships, vitamins and supplements (unless prescribed), and general wellness products. Fertility treatments and surrogacy costs are may be able to access. Mental health counseling and therapy are may be able to access. If you are unsure whether a specific expense qualifies, ask your plan administrator or check the IRS Publication 502, which lists may be able to access and ineligible expenses in detail.

How to claim reimbursement and submit documentation

When you incur a medical expense, you pay for it out of pocket. You then submit a claim to your FSA or HRA administrator—usually through an online portal, by mail, or through a mobile app—along with proof that the expense is may be able to access. Proof typically means a receipt from the provider, an invoice, or an explanation of benefits from your insurance company showing what you paid out of pocket.

The administrator reviews your claim to confirm the expense is may be able to access and that you have not already been reimbursed for it by insurance. If everything checks out, they reimburse you—usually within one to two weeks, though some plans are faster. Some employers issue an FSA debit card that you can use directly at pharmacies and medical providers, which skips the reimbursement step, but you still need to keep receipts in case the plan audits your spending.

Keep all receipts and documentation for at least three years. The IRS can audit FSA and HRA claims, and if you cannot prove an expense was may be able to access, you may have to repay the reimbursement plus taxes and penalties. If your plan uses a debit card, reconcile your account regularly to make sure charges match your actual medical expenses.

The use-it-or-lose-it rule and carryover options

FSA funds that you do not use by the end of the plan year are forfeited. This is the single biggest drawback to FSAs: if you contribute $2,500 and only spend $1,800, you lose the remaining $700. There is no rollover to the next year, and you cannot get a refund. This rule exists because of IRS regulations designed to prevent people from using FSAs as general savings accounts.

Some employers offer a grace period of up to 2.5 months after the plan year ends to spend remaining FSA funds. If your plan has a grace period, you can use FSA money through that date without forfeiting it. Not all plans offer this, so check your plan documents. A few plans also offer a carryover of up to $610 (this limit changes annually) to the next year, but you cannot have both a grace period and a carryover in the same plan.

HRAs have much more generous carryover rules. Unused funds can roll over to the next year, and some HRAs allow unlimited carryover. This makes HRAs less risky if you are unsure how much medical spending you will have. If you are considering an FSA, estimate your medical expenses conservatively and contribute only what you are confident you will spend.

When you can enroll and make changes

You can enroll in an FSA or HRA only during your employer's open enrollment period, which is usually once a year in the fall for coverage starting January 1. If you miss open enrollment, you cannot enroll until the next year—there is no way to join mid-year unless you have a may have access to life event.

may have access to life events include marriage, divorce, birth or adoption of a child, loss of health coverage (yours or a spouse's), a significant change in your employer's health plan, or a change in your employment status. If any of these happen, you have 30 to 60 days (depending on your employer) to enroll in an FSA or HRA or to change your contribution amount. You must notify your employer's benefits department and provide documentation of the event.

Once you are enrolled, you cannot change your contribution amount again until the next open enrollment period, with the exception of another may have access to life event. This inflexibility is why it is important to estimate your medical expenses carefully before you commit to a contribution amount.

Tax implications and what happens when you leave your job

The money you contribute to an FSA or HRA 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. If you contribute $2,500 to an FSA and you are in the 22% federal tax bracket, you save roughly $550 in federal taxes, plus additional savings in payroll taxes. The exact savings depend on your tax bracket and your state's income tax rate.

When you leave your job, you lose access to your FSA balance immediately—even if you have unused funds. You cannot take the money with you, and you cannot transfer it to another account. HRAs are slightly more flexible: some allow you to continue coverage under COBRA (Consolidated Omnibus Budget Reconciliation Act), which means you can keep accessing the account for a limited time, but you have to pay the full premium yourself.

If you have an FSA and you know you are leaving your job, spend down your account before your last day. If you have unused funds when you leave, they are forfeited with no refund or tax adjustment.

Frequently Asked Questions

Can I use FSA money for my spouse's or children's medical expenses?

Yes. FSA and HRA funds can be used for the medical expenses of you, your spouse, and any dependent children, regardless of whether they are covered under your health insurance plan. You just need to submit documentation showing the expense is may be able to access.

What happens if I submit a claim for an ineligible expense?

If the plan administrator determines an expense is ineligible, they will deny the claim and you will not be reimbursed. If you have already been reimbursed and the plan later discovers the expense was ineligible, you may have to repay the reimbursement. Repeated ineligible claims can result in your account being audited or closed.

Can I use an FSA to pay my health insurance premiums?

No, you cannot use FSA funds to pay premiums for your employer's health plan or for individual health insurance. You can use FSA funds to pay premiums for long-term care insurance or for COBRA coverage after you leave your job, but not for regular health insurance premiums.

What if I have both an FSA and an HRA?

Some employers offer both, but the rules are strict. If you have an HRA, you generally cannot also have an FSA, because the IRS considers them duplicative. Check your employer's plan documents or ask your benefits administrator whether you can enroll in both.

Do FSA funds expire if I don't use them within a certain time?

FSA funds expire at the end of your plan year (usually December 31), not after a certain number of months. Any balance remaining at that date is forfeited unless your plan offers a grace period. HRA funds typically do not expire and can roll over year to year.