What Is an FSA and How Do I Use It?  

Saving money for the future is a good way to help protect your financial health and prepare for the unexpected. When it comes to planning for medical costs in particular, a flexible spending account (FSA) can come in handy.

An FSA is an employer-sponsored savings account you can use to help make eligible out-of-pocket healthcare and dependent-care expenses more manageable. FSAs are tax-advantaged accounts, which means you can make pre-tax contributions to the account and spend the money on qualified expenses.¹

Learn more about FSAs and how they can help you save and pay for qualified expenses.

Key takeaways

• FSAs are tax-advantaged accounts offered by employers to help employees save money on eligible healthcare and dependent-care costs.
• Different types of FSAs serve specific purposes and offer unique benefits to employees.
• If you contribute to a health savings account (HSA), you might not be FSA eligible — though certain exceptions exist.
• Contribution and rollover limits are typically updated annually and can differ depending on the FSA you have.
  

How does an FSA work? 

A flexible spending account — or flexible spending arrangement — deducts pre-tax money directly from employees’ paychecks to help them save for qualified healthcare expenses. FSA funds can be used to pay for things like deductibles, co-pays, and medical office visits. Employers can also contribute to an employee’s FSA, but they aren’t required to do so.²

Typically, there are three ways to access your FSA money. You can use a debit card that’s connected to your account, pay providers directly through your online portal, or submit receipts for reimbursement. Check with your employer or FSA provider to find out which option(s) they offer.

FSA eligible expenses 

FSAs can be used to cover the costs of various medical, dental, and vision expenses — as long as they’re qualified.

Here are some examples of qualified FSA expenses, according to the Internal Revenue Service (IRS) and FSA Store:^2,3

• Acupuncture
• Ambulance services
• Band-aids  and bandages
• Birth control (with a prescription or OTC)
• Blood pressure monitor
• Body scans
• Chiropractic care
• Cholesterol test kit
• COVID-19 PPE (hand sanitizers, wipes, and masks for personal use)
• Co-insurance
• Deductibles
• Dental care
• Diagnostic devices services
• Eye exams
• Eyeglasses (prescription)
• Laser eye surgery or radial keratotomy (to treat vision problems)
• First aid kits
• Hospital services 
• Immunizations
• Laboratory fees
• Medical testing devices
• Menstrual care products and OTC pain relievers
• Nursing services
• Office visits (medical, dental or vision)

For a more complete list of eligible expenses, review IRS Publication 502 or the FSA Store eligibility list.

FSA eligibility 

To be eligible for an FSA, you need to work at a company that offers FSAs as part of their employee benefits. Generally, employees don’t need to be enrolled in a health insurance plan to open an FSA.⁴

If you have a health savings account (HSA), you likely won’t be eligible for a general healthcare FSA, because they're used to pay for the same types of medical expenses. However, there are specialty FSAs — like a limited purpose FSA (LP-FSA) and dependent care FSA (DC-FSA) — that you can use in conjunction with an HSA.

Types of FSAs 

A healthcare FSA is a general-purpose FSA. In addition to this type of FSA, some employers may offer FSAs that suit specific needs. Covered expenses, HSA compatibility, and plan details can differ depending on the type of FSA you have.

Healthcare FSA 

A healthcare FSA is a standard FSA that can be used to help cover medical, dental, and vision expenses. 

For 2024, IRS contribution limits for a healthcare FSA are $3,200.⁵

Healthcare FSAs generally can’t be used in conjunction with an HSA.¹

Limited purpose FSA (LP-FSA)

A limited purpose FSA is similar to a standard FSA, except it can only be used to help cover qualified dental, vision, and preventive care expenses.

For 2024, contribution limits for an LP-FSA are $3,200. 

LP-FSAs can typically be used in conjunction with HSAs. You might be able to maximize your HSA savings when you use funds from your LP-FSA instead of your HSA. For example, it can promote more tax-free account growth and allow you to save the full annual maximum in your HSA.

Dependent care FSA (DC-FSA)

A dependent care FSA is used to pay for qualified medical expenses for dependents. Dependents are typically defined as children who are under the age of 13 and adults who are physically or mentally unable to take care of themselves. Eligible expenses could include things like child care, after-school programs, and senior day care.

For 2024, the contribution limit for a DC-FSA is $5,000 per household or $2,500 for married couples filing separately.⁶DC-FSAs can be used in conjunction with an HSA.

Post-deductible FSA

A post-deductible FSA is a slightly less common type of FSA. Until you reach your minimum annual deductible, these accounts can only be used to cover dental and vision expenses. However, once the deductible is met, you can use the funds from a post-deductible FSA to help pay for any qualified medical costs. These accounts are also HSA-compatible.

FSA: Benefits and limitations 

Having an FSA comes with multiple advantages, such as saving on taxes. But FSAs can also have disadvantages, like “use-it-or-lose-it” restrictions and lower contribution limits.

Consider the following benefits and limitations of an FSA:

Benefits 

• Contributions aren’t subject to tax: The funds you contribute to an FSA are deducted from your paycheck and aren’t subject to employment or federal income tax.1
• Employers can contribute: Your employer can make contributions to your FSA, though they aren’t required to do so.¹
• Money can be used on everyday items: You can use your FSA funds to pay for day-to-day items, such as sunscreen, band-aids, and menstrual care products.³
  
• Funds are easy to access: Withdrawing money from your account is fairly simple. With an FSA debit card or online portal, you can easily access your FSA funds. 

Limitations 

• Funds typically need to be used by the end of the year: Unused funds in an FSA will generally need to be used by the end of the plan year, or they’re forfeited. However, some employers may offer a 2.5 month grace period to allow you extra time to use the money. Or employers might let you roll over unused funds up to a certain amount.¹ As of 2024, you may be able to roll over a maximum of $640 of unused funds, depending on your plan.⁵ But not all employers will offer these options.
• Accounts aren't portable: FSAs are tied to your employee benefits, so if you leave your job or are terminated, you typically won’t be able to take the money in your FSA with you.
• Your employer has to offer it: If you’re self-employed or your employer doesn’t offer FSAs, you won’t be able to open one.¹

FSA vs. HSA

Both an FSA and an HSA can help you pay for medical care while saving on taxes, but there are some key differences between FSAs and HSAs:

• HSAs are owned by an individual, not an employer.⁷
• HSAs are available to anyone who can meet the IRS’s eligibility requirements, including having a high-deductible health plan (HDHP).¹
• Funds in an HSA aren’t subject to use-it-or-lose-it mandates and the full balance can be rolled over to the following plan year.⁷
• Money in an HSA can be invested or earn interest — FSA funds can’t be used this way.^7,8
• Money in an HSA is portable and goes with you if you change employers or retire.⁸

Is an FSA right for me? 

If your employer offers an FSA, you may want to consider opening one for its potential health and financial benefits. But first, make sure it's the right choice for you and your situation. Think about your finances and priorities to decide if you’ll reasonably be able to contribute enough to an FSA to make it worthwhile. If you often pay out of pocket for medical expenses, an FSA might be able to save you money in the short and long term.

If you decide to open an FSA, you would normally do so during your company’s open enrollment period. At this time, you can enroll in or make changes to your FSA, as well as your other employer-sponsored benefits. Speak with your human resources (HR) department to learn more about FSAs and how to start one. (Outside of the open enrollment period, changes can only be made mid-year if you have a qualifying life event.)