A flexible spending account (FSA) lets you set aside part of your paycheck before taxes to pay for medical, dental, and vision expenses. The money is deducted automatically from your pay, and you never owe federal income tax or payroll taxes on it. For someone in the 22% tax bracket contributing $2,000 a year, that translates to roughly $440 or more in tax savings. Here’s how the whole system works, from enrollment to spending your balance.
How FSA Contributions Work
An FSA is an employer-sponsored benefit. You can’t open one on your own, and self-employed individuals aren’t eligible. During your company’s open enrollment period (typically in the fall for the following year), you choose a dollar amount to contribute. That amount is then divided evenly across your paychecks for the year and withheld before taxes are calculated.
The IRS sets an annual cap on health FSA contributions. For 2024, the limit is $3,200, and for 2025 it rises to $3,300. Your employer may also chip in additional funds, but that’s uncommon. Once you’ve locked in your election, you generally can’t change it until the next open enrollment unless you experience a qualifying life event (more on that below).
What You Can Spend FSA Money On
FSA-eligible expenses are broadly defined as costs related to the diagnosis, treatment, or prevention of disease. In practice, that covers a wide range of everyday health spending:
- Medical care: doctor visits, urgent care copays, physical exams, lab work, surgeries, and specialist appointments
- Dental: cleanings, fillings, crowns, orthodontics, and dental exams
- Vision: eye exams, prescription glasses, contact lenses, and lens solution
- Prescriptions: any medication prescribed by a doctor
- Over-the-counter products: pain relievers, allergy medicine, cold and flu remedies, first aid supplies, sunscreen, and menstrual care products all qualify without a prescription
What doesn’t qualify: anything that’s “merely beneficial to general health” without treating a specific condition. A gym membership, for example, is typically not eligible. Vitamins and supplements fall into a gray area. If your doctor determines a supplement is medically necessary to treat a diagnosed condition, you can get it covered by submitting a Letter of Medical Necessity. This form requires your practitioner to document the specific medical condition, the recommended product, and the expected duration of treatment.
How to Pay With Your FSA
Most employers issue an FSA debit card that’s linked to your account balance. You swipe it at the pharmacy, doctor’s office, or qualifying retailer just like a regular debit card. Many major retailers and online pharmacies flag FSA-eligible items automatically, making checkout straightforward.
If you pay out of pocket instead, you can submit a claim for reimbursement. This usually involves uploading a receipt or invoice through your FSA administrator’s website or app, though some plans accept fax or mail. Keep itemized receipts for everything. Your administrator may ask you to verify purchases even when you use the debit card, so storing digital copies of receipts saves headaches later.
One important detail: your full annual election is available on day one of the plan year, even though your contributions come out of each paycheck gradually. If you elected $2,400 for the year, you can spend the entire $2,400 in January, before most of it has actually been deducted. This is a real advantage if you have a large expense early in the year, like a dental procedure or new glasses.
The Use-It-or-Lose-It Rule
FSA funds don’t roll over indefinitely. Any money left in your account at the end of the plan year is forfeited unless your employer offers one of two safety nets. The first option is a grace period of up to two and a half months after the plan year ends, giving you extra time to incur expenses. The second is a carryover provision, which lets you roll over a limited amount (up to $640 for 2024 or $660 for 2025) into the next year. Employers can offer one of these options or neither, but not both.
This is why careful planning matters. Estimate your expected medical, dental, and vision costs before choosing your contribution amount. If you’re unsure, start conservative. It’s better to leave a small tax benefit on the table than to forfeit hundreds of dollars. As the year winds down, check your balance. Common ways to spend remaining funds include stocking up on contact lenses, scheduling a dental cleaning, buying new prescription sunglasses, or grabbing FSA-eligible items like bandages, thermometers, and pain relievers.
Health FSA vs. Dependent Care FSA
Your employer may offer a Dependent Care FSA alongside the health FSA. These are separate accounts with separate rules. A Dependent Care FSA covers child care and elder care expenses that allow you and your spouse to work. Qualifying children must be under age 13. Eligible expenses include daycare, preschool, nursery school, before- and after-school programs, and day camps, even specialty camps like soccer or computer camp. Overnight camps do not qualify.
The contribution limit for a Dependent Care FSA is $5,000 per household (or $2,500 if married and filing separately), which is set by a different part of the tax code than the health FSA limit. Unlike a health FSA, the full balance isn’t available on day one. You can only be reimbursed up to the amount contributed so far.
Limited Purpose FSAs and HSA Compatibility
If you’re enrolled in a high-deductible health plan with a Health Savings Account, you generally can’t also have a regular health FSA. However, you can pair your HSA with a Limited Purpose FSA, which covers only dental and vision expenses. This lets you save your HSA funds for larger medical costs while still getting a tax break on routine eye exams, glasses, and dental work.
Changing Your Contribution Mid-Year
Outside of open enrollment, you can only adjust your FSA election if you experience a qualifying life event recognized by the IRS. These include:
- Marriage, divorce, or legal separation
- Birth or adoption of a child
- Death of a spouse or dependent
- A change in employment status for you, your spouse, or a dependent that affects benefit eligibility
- A change in dependent eligibility, such as a child turning 13 (for Dependent Care FSAs)
- A change in daycare provider or cost (Dependent Care FSA only)
You typically have 30 to 60 days after the event to request a change, depending on your employer’s plan. If none of these apply, your election stays locked until the next enrollment window.
What Happens to Your FSA If You Leave Your Job
When you leave a job, your FSA debit card stops working and any remaining balance goes back to your employer. You have a short window, usually through your last day of employment, to submit claims for expenses incurred while you were still covered.
There is one potential option: COBRA continuation coverage. If you elect COBRA for your FSA, you can keep submitting claims against your remaining balance. The catch is significant, though. Your contributions under COBRA come from after-tax dollars, eliminating the core tax advantage. You’ll also pay a 2% administrative fee on top of the full contribution amount. And FSA funds can never be used to pay health insurance premiums, including COBRA premiums themselves. For most people, COBRA for an FSA only makes sense if you have a large balance and known upcoming expenses.
The smarter strategy is to spend down your FSA balance before your last day, especially if you know a departure is coming. Schedule any overdue appointments, fill prescriptions, and stock up on eligible supplies while your account is still active.