What Is an FSA and How Does It Work?

If you want to save money on healthcare expenses, an FSA could help you out.

A flexible spending account (FSA) is an employer-sponsored benefit that allows you to pay for certain medical, vision, and dental expenses that are not covered by your insurance plan. You won’t have to pay taxes on your FSA dollars if you use them to pay for healthcare expenses for yourself, your spouse, or qualifying dependents. 

What does FSA stand for?

FSA is short for “flexible spending account.” People may also refer to it as a flexible spending arrangement. 

There are three main types of FSAs:  

• Health FSAs: These accounts are for general-purpose healthcare expenses, including over-the-counter medications and monthly period supplies. 

• Limited-purpose FSAs: With this type of FSA, expenses are typically limited to dental and vision care. 

• Dependent care FSAs: These accounts are used to pay for qualified dependent care services, such as after-school programs or adult daycare. 

How does an FSA work?

An FSA is an employer-sponsored health benefit. That means you cannot sign up for an FSA if you are self-employed. FSAs are only available to employees who work for a company that offers this type of account. 

If you’re wondering if an FSA is right for you, here’s some information about how these accounts work.

Payroll deductions 

An FSA is funded by deductions taken directly out of your paycheck. During your benefits enrollment period, you will decide how much of your salary you want to put into your FSA for the year, which determines how much money is taken out of each paycheck. Some employers also contribute to employees’ FSAs, but they are not required to do so. 

Taxes

The money you contribute to your FSA reduces your taxable income. For example, if your annual salary is $50,000 and you contribute $3,000 to your FSA, you will only pay taxes on $47,000 of earnings. You will not have to pay taxes on your FSA dollars if you use the money to pay for FSA-eligible expenses. You also won’t be able to claim a tax deduction for your contributions, because your FSA dollars were never taxed.

EXPERT PICKS: WHAT TO READ NEXT

• Need to use your flexible spending account (FSA) funds before the deadline? Check out this list of FSA-eligible items, including everything from vision care to prescription medications.

• Switching health insurance plans? You may be eligible to contribute to a health savings account (HSA).

• HSA vs. FSA: Both of these are tax-advantaged accounts, but here are some key differences between them

Using FSA funds

You will have access to your entire FSA balance at the beginning of the plan year, even though the full amount hasn’t been deducted from your paycheck yet. FSAs are known for their “use it or lose it” feature, so you should set aside only as much money as you think you will use during the year. 

What is the maximum amount you can put into a flexible savings account?

The federal government sets an annual limit on the amount you can contribute to your FSA. This amount is adjusted for inflation and often rises from year to year. For 2025, the FSA contribution limit is $3,300 per person. If you are married and your spouse has an FSA through their employer, they can also contribute up to the annual limit. 

If you put too much money in your FSA, you could lose all your funds at the end of the plan year. Some employers allow you to carry over funds to the next plan year or extend the amount of time you can use funds. For 2025, you can roll over up to $660 in FSA dollars if your employer allows it.

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Here’s a table that shows the contribution and carryover maximums for health FSAs and limited-purpose FSAs from 2019 through 2025. You’ll notice that the annual limits typically jump by $50 or $100 every year. There was a larger increase from 2022 to 2024 owing to record inflation numbers. And it should be noted that Congress temporarily modified the carryover rules for 2020 and 2021 as part of COVID relief, letting employees roll over their entire FSA balance if their company allowed it.

Source: IRS 

How much time do you have to use your FSA?

You generally have to spend the funds in your FSA by the end of the plan year, though your employer may allow you to carry unused funds over to the next year, up to the IRS limit. 

If your employer doesn’t allow you to carry over FSA funds, they may offer a grace period. This gives you extra time to use the money in your FSA before you lose it. In many cases, the grace period is 2.5 months. That means if your plan year finishes at the end of December, you would have until March 15 of the following year to use your funds.

Your employer can offer either a carryover option or a grace period, but not both. Also, your employer is not under any obligation to offer either option.  

If you don’t spend all the money in your FSA before the deadline, you risk losing the funds you contributed to the account. Your employer cannot return your FSA dollars back to you directly. They can disburse the funds among all employees enrolled in an FSA or use the money to offset the cost of administering FSA benefits. 

How much FSA money can roll over?

The maximum carryover limit for FSAs is set by the IRS and can change every year. It’s equal to 20% of the FSA annual contribution limit. For 2025, the annual contribution limit is $3,300 and the carryover limit is $660, or 20% of the contribution cap. 

In practice, however, the actual amount you can roll over to the next plan year will depend on your employer, which may set a maximum that is lower than the amount allowed by IRS guidelines. 

If you’re unsure whether your contributions will roll over, you can reach out to your employer’s benefits department.

How do you use an FSA?

There are a few things you need to know about setting up and using an FSA. Here is some information that can help you get started.

How to sign up for an FSA

If your employer offers an FSA, you can sign up during the following times: 

• When you start your new job 

• During the open enrollment period

• At the time of a qualifying life event, such as having a new baby or getting married 

How to use your FSA

There are two main ways to use your FSA:

• Use your FSA debit card to make purchases in-store and online. 

• Submit your receipts to your FSA plan administrator prior to the deadline to receive reimbursement for qualified medical expenses. 

Before you make a purchase, make sure your healthcare expense is FSA-eligible. The IRS provides a list of eligible healthcare expenses. 

It may be intimidating to try to navigate the IRS-approved list of expenses on your own. You can reach out to your FSA administrator to confirm which expenses are eligible. You may be surprised to discover that some expenses, like iron supplements, can be approved FSA expenses if your healthcare provider writes you a letter of medical necessity.  

What items and expenses are eligible for purchase with FSA funds?

The money you put into your FSA can be used to pay for deductibles, copays, and coinsurance, but you can’t use these pretax dollars for insurance premiums. 

Below are a few more medical expenses you can pay for with an FSA if you aren’t receiving reimbursements for them from your employer or insurance: 

• Adult diapers 

• Acne treatments (pimple patches, facial cleansers, etc.) 

• Artificial limbs 

• Blood pressure monitors 

• Body scans 

• Crutches 

• First aid supplies

• Hearing aids  

• Home diagnostic tests and devices 

• Invisalign 

• Lab fees 

• Lip balm 

• Medical-alert bracelets 

• Medical diagnostic products

• Menstrual care products

• Occupational therapy 

• Over-the-counter medicines

• Oxygen equipment 

• Prescription contact lenses 

• Prescription sunglasses 

It’s important to consult your FSA plan administrator to ensure your expenses are FSA-eligible. 

What makes a product or service FSA-eligible? 

An item is FSA-eligible if it is considered a qualified medical expense. These expenses must be related to the prevention, treatment, or diagnosis of a condition, physical disability, or mental illness. Expenses for general health needs, such as toothpaste or fitness classes, typically wouldn’t count as FSA-eligible. 

Qualified medical expenses are typically the same types of products and services that count as deductible medical expenses on your tax return. For details, consult the IRS’s list of qualified medical and dental expenses. 

What are the benefits of an FSA?

An FSA allows you to pay for qualified medical expenses with tax-free dollars. But there are other benefits you should consider, including: 

• Fund availability: Your entire annual FSA contribution amount is available on the first day of the plan year. Let’s say you choose to contribute $2,400 to your FSA for the year. You have access to all $2,400 on January 1, regardless of the amount that has actually been deducted from your paycheck at that time.

• Convenient spending: You can quickly access FSA funds with an FSA debit card. If you don’t have an FSA debit card, you can submit receipts to obtain reimbursement for qualified medical expenses. 

• Savings on everyday items: You can use your FSA dollars to buy items on your shopping list, such as acne treatments, menstrual cups, tampons, and sunscreen.      

How does an FSA differ from an HSA?

FSAs and health savings accounts (HSAs) are both tax-advantaged accounts used to pay for qualified medical expenses. However, these accounts come with different contribution limits, insurance plan requirements, and rollover options, among other things. 

One of the main differences between an FSA and HSA is the length of time you have to use the funds. You will lose the funds in your FSA if you don’t use them before the deadline, but HSA funds never expire. You can accumulate funds in your HSA every year, invest the money, and use your HSA dollars to pay for qualified medical expenses now and during retirement. 

Is having an FSA worth it?

It’s important to evaluate your healthcare needs and expenses to determine whether having an FSA makes sense for you. Although you can save money by making purchases with tax-free dollars, your FSA dollars will go to waste if you don’t use them before the deadline. 

Here are some questions you should consider before signing up for an FSA: 

• What healthcare expenses will you need to cover out of pocket during the plan year? 

• Do you plan to quit your job in the next year? 

• Does your company offer a grace period or carryover option for unused FSA funds?  

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Written by:

Charlene Rhinehart, CPA

Charlene Rhinehart, CPA, is a personal finance editor at GoodRx. She has been a certified public accountant for over a decade.

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