A flexible spending account (FSA) is a workplace benefit that lets you set aside pre-tax money to pay for medical and dependent care costs that your insurance doesn't cover.
You choose how much to contribute each year during open enrollment, and that money comes out of your paycheck before taxes are calculated. When you need to pay for a covered expense—a copay, prescription, dental work, or childcare—you submit a receipt and the FSA reimburses you from your set-aside funds. The tax savings come because you avoid paying federal income tax, Social Security tax, and Medicare tax on the money you contribute.
The catch is the use-it-or-lose-it rule: money left in your FSA at the end of the plan year does not roll over to the next year. Some plans allow a small carryover (usually $610 in 2024, though this amount changes yearly) or a grace period of up to 2.5 months into the next year to spend remaining funds. If you do not use the money within that window, it stays with your employer. This is why choosing the right contribution amount matters—you need to estimate what you will actually spend.
Key Takeaways
- FSA contributions reduce your taxable income, which means you pay less in federal, Social Security, and Medicare taxes on that money.
- You can use FSA funds for copays, deductibles, prescriptions, dental work, vision care, and dependent childcare, but not for health insurance premiums or over-the-counter medications without a prescription.
- Any money you do not spend by the end of the plan year (or grace period) is forfeited, so estimate conservatively based on what you know you will need.
- You must submit receipts to be reimbursed, and some employers use a debit card that lets you pay directly at the point of service instead.
- You can only enroll in or change your FSA contribution during open enrollment or after a may have access to life event like a birth, marriage, or job loss.
What expenses an FSA actually covers
The IRS maintains a list of may have access to medical expenses that FSAs can pay for. These include copays and coinsurance, deductibles, prescription medications, dental and vision care, hearing aids, crutches, and certain medical equipment. Childcare and dependent care expenses—such as daycare, after-school programs, or summer camps for children under 13—are also covered if you have a dependent care FSA.
Over-the-counter medications like cold medicine, pain relievers, and allergy pills are not covered unless you have a prescription from a doctor. Vitamins, supplements, and cosmetic procedures are not covered. Health insurance premiums themselves cannot be paid from an FSA, though you can use it for out-of-pocket costs after you have paid the premium.
The rules are strict because FSAs are tax-advantaged accounts. If you are unsure whether a specific expense qualifies, ask your FSA plan administrator or check the IRS Publication 502 for the full list. Some employers also provide a list of pre-approved vendors where you can use an FSA debit card without needing a receipt.
How much to contribute and the tax savings
The IRS sets an annual limit on how much you can contribute to a medical FSA. For 2024, that limit is $3,200 per person (this amount increases most years). For dependent care FSAs, the limit is $5,000 per household per year. You choose your contribution amount during open enrollment, and it is deducted from your paycheck in equal installments throughout the year.
The tax savings depend on your tax bracket. If you contribute $2,000 to a medical FSA and you are in the 22% federal tax bracket, you save roughly $440 in federal taxes alone. Add state and local taxes plus Social Security and Medicare taxes (7.65%), and the total savings can reach 30% to 40% of your contribution. That means a $2,000 contribution might cost you only $1,200 to $1,400 in actual take-home pay reduction.
However, this savings only works if you actually spend the money. If you contribute $2,000 and only spend $1,000, you lose the tax benefit on the remaining $1,000. This is why many people contribute conservatively—enough to cover predictable costs like regular prescriptions or childcare, but not so much that they risk forfeiting unused funds.
How to submit claims and get reimbursed
Most FSA plans offer two ways to access your money: a debit card or a reimbursement claim. With a debit card, you swipe it at the pharmacy, doctor's office, or childcare provider, and the cost is deducted from your FSA balance immediately. No receipt submission needed in many cases, though some providers may ask for one later to verify the expense was may have access to.
If you do not have a debit card or prefer to pay out of pocket, you can submit a claim. You pay for the expense yourself, then send a receipt and a claim form to your FSA administrator. The administrator reviews the receipt to confirm it is a may have access to expense, then reimburses you by check or direct deposit. This process usually takes one to two weeks.
Keep all receipts for at least three years in case your employer or the IRS audits your FSA account. Receipts should show the date, the provider's name, the service or item purchased, and the amount paid. If a receipt is missing, some administrators will accept a signed statement from the provider confirming the expense.
The use-it-or-lose-it rule and how to avoid losing money
The use-it-or-lose-it rule means that any FSA balance remaining on December 31 (or the last day of your plan year) is forfeited. Your employer keeps that money; it does not roll over to you or to the next year. This is a real risk, and it is why choosing the right contribution amount is critical.
Some employers offer a grace period of up to 2.5 months into the next calendar year to spend remaining funds. If your plan has a grace period, you can spend money from the previous year's FSA through that date. Other employers offer a limited carryover, allowing you to carry forward up to $610 (in 2024) to the next plan year. Ask your benefits administrator whether your plan has either option.
To avoid forfeiting money, estimate conservatively. Look at what you spent on copays, prescriptions, and childcare in the past year, then contribute slightly less than that amount. If you have a predictable expense coming—a planned dental procedure or a new childcare arrangement—factor that in. If your situation changes mid-year (you lose a job, have a baby, or get married), you may be able to change your FSA contribution during a may have access to life event window.
FSA vs. HSA: which account to choose
If your employer offers both an FSA and a health savings account (HSA), you cannot contribute to both in the same year—the IRS prohibits it. The choice depends on your health plan and how much you spend on medical care.
An FSA is better if you have predictable, near-term medical expenses and want to save on taxes immediately. You do not need a high-deductible health plan to open an FSA, and you can use the money right away. The downside is the use-it-or-lose-it rule and the fact that FSA money does not roll over or grow.
An HSA is better if you have a high-deductible health plan, expect lower medical spending, and want to save for future healthcare costs. HSA money rolls over year to year, grows tax-free if invested, and can be used for retirement healthcare expenses after age 65. However, you must be enrolled in a high-deductible health plan to open an HSA, and you cannot use the money for non-medical expenses before age 65 without paying taxes and a penalty.
Some people use both accounts in different years: an FSA when they know they have big medical expenses coming, and an HSA when their spending is lower and they want to build long-term savings.
When you can enroll and what happens if you leave your job
You can only enroll in an FSA or change your contribution during your employer's open enrollment period, which usually happens once a year in the fall. Outside of open enrollment, you can change your FSA contribution only if you have a may have access to life event: birth or adoption of a child, marriage or divorce, death of a spouse or dependent, significant change in childcare costs, loss of health coverage, or change in employment status.
If you leave your job, your FSA coverage typically ends on your last day of employment. Any unused FSA balance is forfeited—you cannot take it with you or roll it into a new employer's FSA. This is another reason to spend down your FSA before you leave a job. If you are planning to leave, try to use up your remaining balance in the weeks before your departure.
If you are laid off or fired, you may be able to continue your FSA under COBRA (Consolidated Omnibus Budget Reconciliation Act), though you will pay the full premium yourself plus an administrative fee. COBRA continuation typically lasts 18 months. Check with your employer's benefits department to see if COBRA is available for FSAs at your company.
Frequently Asked Questions
Can I use my FSA for my spouse or children?
Yes, you can use FSA funds for medical expenses of your spouse and any dependent children, even if they are not on your health insurance plan. The expense must still be may have access to—copays, prescriptions, dental work, and so on. Dependent care FSAs specifically cover childcare expenses for children under 13.
What happens if I submit a receipt for an expense that is not may have access to?
Your FSA administrator will deny the claim and ask you to resubmit with a different receipt or to repay the money. If you have already been reimbursed, you may owe the money back. Repeated submission of non-may have access to expenses can trigger an audit of your account.
Can I change my FSA contribution mid-year?
Only if you have a may have access to life event—birth, marriage, divorce, death, significant change in childcare costs, or loss of coverage. You must notify your employer within 30 to 60 days of the event (rules vary by employer). Outside of these events, you are locked into your contribution amount for the entire plan year.
Do I have to submit receipts if I use an FSA debit card?
Not always. Many FSA debit cards work like regular debit cards at pharmacies and medical offices without requiring a receipt at the time of purchase. However, some administrators may request receipts later to verify the expense was may have access to. Keep receipts for at least three years in case you are asked to provide them.
What if I do not spend all my FSA money by the end of the year?
The money is forfeited unless your plan offers a grace period or carryover. A grace period (up to 2.5 months into the next year) lets you spend the previous year's money. A carryover allows you to roll forward up to $610 (in 2024) to the next plan year. Check your plan documents to see which option your employer offers.