A flexible savings account lets you set aside pre-tax money for medical costs that your insurance doesn't cover

A Flexible Spending Account (FSA) is a workplace benefit that lets you put money into a special account before taxes are taken out of your paycheck. You then use that money to pay for medical, dental, or vision expenses that your health insurance doesn't cover or that you have to pay out of pocket. The main advantage is that you avoid paying federal income tax, Social Security tax, and Medicare tax on the money you set aside — which can save you 20 to 40 percent depending on your tax bracket.

The catch is that FSAs come with strict rules. You can only set up or change your account during your employer's open enrollment period, usually once a year. You have to spend the money within the same calendar year or lose it — there is no rollover to next year (with rare exceptions). And you can only use the money for specific medical costs that the IRS allows, not for anything else.

Key Takeaways

  • You contribute pre-tax dollars through payroll deduction, which reduces the income tax and payroll taxes you owe that year.
  • You can only set up or change your FSA during your employer's open enrollment period, which is usually once per year.
  • Money left unspent at the end of the calendar year is forfeited — you cannot carry it over to the next year, with very limited exceptions.
  • You can use FSA funds only for IRS-approved medical, dental, and vision costs, including deductibles, copays, and certain over-the-counter items.
  • You access the money through a debit card, reimbursement form, or direct payment to providers, depending on your plan.

How money goes into your FSA and when you can contribute

You enroll in an FSA during your employer's open enrollment period — usually a window of one to three weeks in the fall for benefits that start January 1. You choose how much to contribute for the entire year, and that amount is divided equally across your paychecks. The money comes out before federal income tax, Social Security tax, and Medicare tax are calculated, so your taxable income is lower.

For 2024, the maximum you can contribute to an FSA is $3,300 per year. That limit can change year to year, so check with your employer or benefits administrator for the current year's cap. You cannot change your contribution amount during the year unless you have a may have access to life event — such as a marriage, divorce, birth of a child, or loss of other health coverage. Simply changing your mind about how much you want to save is not a may have access to event.

If you leave your job or your employer stops offering an FSA, you may be able to continue using the money you have already contributed, but the rules vary. Ask your plan administrator before you resign or retire.

What medical costs you can pay for with FSA money

The IRS maintains a list of approved medical expenses. Common ones include health insurance deductibles, copays, coinsurance, prescription medications, dental work (fillings, crowns, orthodontics), vision care (glasses, contacts, exams), and hearing aids. You can also use FSA money for certain over-the-counter items — insulin, pain relievers, allergy medicine, and antacids are allowed, but you need a prescription or doctor's note for most other over-the-counter drugs.

Expenses that do not count include cosmetic procedures (unless medically necessary), gym memberships, vitamins (unless prescribed), toothpaste, deodorant, and most beauty or wellness products. If you are unsure whether a specific cost qualifies, ask your plan administrator or check the IRS Publication 502, which lists approved medical expenses in detail.

One important rule: you can only use FSA money for expenses you incur during the year you are enrolled. If you have dental work done in December but do not receive the bill until January, you cannot use FSA funds from the previous year to pay it.

How you access and spend FSA money

Most FSAs issue a debit card that you can use at pharmacies, doctor offices, and other medical providers. When you swipe the card, the amount is deducted from your FSA balance. Some plans also let you pay the provider directly and then submit a reimbursement request to your FSA administrator — you fill out a form, attach a receipt or invoice, and the plan sends you a check or direct deposit.

A few plans require you to pay out of pocket first and then request reimbursement. This method takes longer but works the same way: you submit proof of the expense and the plan reimburses you. Keep all receipts and invoices for at least three to five years in case the plan asks for documentation.

Some providers, especially large pharmacy chains and dental offices, are set up to bill FSAs directly. Ask your provider whether they accept FSA payments before your appointment so you know what to expect at checkout.

The use-it-or-lose-it rule and what happens to unspent money

Any money left in your FSA at the end of the calendar year is forfeited — you cannot roll it over to the next year or cash it out. This is the biggest risk of an FSA. If you contribute $2,000 and only spend $1,500, the remaining $500 is gone. Your employer cannot return it to you, and you cannot carry it forward.

Because of this rule, you should estimate your medical costs carefully before you enroll. Look at what you spent on copays, prescriptions, dental work, and vision care in the past year, and use that as a guide. If you have a planned procedure coming up, factor that in. If you are uncertain, contribute a smaller amount rather than risk losing money.

There is one exception: some employers offer a "grace period" of up to two and a half months into the next year to spend money from the previous year. A few plans also allow you to carry over up to $610 (for 2024) to the next year. Ask your employer whether your plan includes either of these options — they are not automatic.

FSA versus Health Savings Account (HSA) — which one to choose

If your employer offers both an FSA and an HSA, you need to understand the difference because you cannot have both at the same time. An HSA is only available if you are enrolled in a high-deductible health plan (HDHP). Unlike an FSA, an HSA lets you roll over unused money year after year, and you can invest it like a retirement account. HSAs also have higher contribution limits.

The tradeoff is that an HSA requires you to be in a high-deductible plan, which means you pay more out of pocket before your insurance kicks in. An FSA works with any health plan and has lower contribution limits, but you get the tax savings immediately and do not have to worry about investment decisions.

If you have a high-deductible plan and expect to have significant medical costs, an HSA is usually the better choice because you can keep the money. If you have a traditional health plan and want to save on taxes for predictable medical costs, an FSA makes sense. Some people use both by putting money in an HSA for long-term savings and an FSA for immediate medical expenses, but check your plan rules first.

What to do if you change jobs or lose coverage

If you leave your job mid-year, you generally lose access to your FSA. However, you may be able to use the money you have already contributed through the end of the calendar year, depending on your employer's plan. Some employers let you continue using your FSA balance after you leave; others do not. Contact your former employer's benefits administrator or your plan's customer service line to find out.

If you lose your job or your employer stops offering an FSA, that counts as a may have access to life event. You have 30 to 60 days (depending on your state) to enroll in a new FSA through your new employer or through the marketplace. If you do not have a new employer plan available, you cannot open an individual FSA — they are only available through employers.

If you are on COBRA (continuing your former employer's health insurance after you leave), you can usually continue your FSA as well, but you have to pay the full premium yourself instead of splitting it with your employer. The contribution limits and use-it-or-lose-it rule still apply.

Frequently Asked Questions

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

No. The debit card is restricted to IRS-approved medical expenses only. If you try to use it for groceries, gas, or other non-medical items, the transaction will be declined. Some cards have safeguards that prevent you from even attempting a non-medical purchase.

What happens if I contribute too much and do not spend it all?

The unspent money is forfeited at the end of the year. You cannot get it back, roll it over, or cash it out. This is why it is important to estimate your medical costs carefully before you enroll. If you are unsure, contribute less rather than more.

Can I change my FSA contribution amount if my medical needs change during the year?

Only if you have a may have access to life event, such as a birth, marriage, divorce, or loss of other coverage. A change in your health or medical needs alone does not allow you to adjust your contribution. You have to wait until the next open enrollment period.

Do I need receipts to use my FSA debit card?

Most of the time, no — the debit card works like a regular card at the point of sale. However, your plan administrator may ask you to provide receipts later to verify that the purchase was for an approved medical expense. Keep all receipts for at least three to five years.

Can I use my FSA to pay for my spouse's or child's medical expenses?

Yes, as long as they are claimed as dependents on your tax return. You can use FSA money for their copays, prescriptions, dental work, and other approved medical costs. The money belongs to you, not to them, so you control how it is spent.