Key Takeaways
- A flexible spending account allows you to set aside money for medical costs while enjoying tax benefits.
- Maximum FSA contribution levels range from $2,500 to $5,000 in 2024.
- If you don’t spend your full contribution amount by the end of the calendar year, you can wind up losing money. You can only roll over a certain amount from one year to the next with an FSA.
Medical care can be expensive. A flexible spending account, or FSA, is a way to set aside funds for a wide range of health care costs, from allergy medication to eye exams, and enjoy tax benefits for doing so.
Not all employers offer FSAs, but if yours does, it can help you lower your taxable income. Read on to learn more about how flexible spending accounts work and whether you can use one to pay for your future medical expenses.
What is a flexible spending account?
An FSA is a tax-advantaged account that lets you contribute and use pre-tax dollars to pay for eligible medical expenses. You don't need any specific type of health plan to qualify for an FSA, but your employer must offer one in order for you to enroll.
When you sign up for an FSA, you declare your contributions for the year. Your FSA is then pre-funded on the first day of the plan, and your contributions are broken down into installments that your employer will automatically withdraw from your paycheck.
FSAs can be an effective way to pay for health-related expenses such as:
- Insulin
- Crutches
- Birth control
- Pregnancy tests
- Eyeglasses and contact lenses
- Prescribed medicines
- Breastfeeding pumps
- Dental treatments
- Chiropractors
- Hearing aids
The IRS offers a comprehensive list of eligible medical expenses. But note that you can’t use your FSA to pay for insurance premiums. Below are three main types of FSAs, along with 2024 contribution limits.
| Type of FSA | What it covers | Maximum contribution |
| Health Care FSA or HCFSA | Any eligible medical costs, like medical devices or prescriptions | $3,200 |
| Limited Health Expense Health Care FSA, or LEX HCFSA | Any eligible dental and vision expenses | $3,200 |
| Dependent Care FSA | Any child or adult dependent care expenses | $5,000 per household or $2,500 if married but filing separately |
How does an FSA work?
A flexible spending account can help you plan for predictable medical expenses — and sometimes unexpected costs — throughout the year. Here's what to expect if you sign up for an FSA:
Choose how much to contribute. At the beginning of the plan year, when you're enrolling in your benefit plans, you'll decide how much money you want to put in your FSA for the year. In some cases, employers may also contribute to flexible spending accounts. In 2024, the maximum amount an employee can contribute to an FSA is $3,200.
Your plan begins. The amount you designate for the year is available in full on the first day of the year. Your employer will then take contributions out of your paycheck in equal installments each pay period. Your employer may also contribute to your account.
Spend your money or submit a claim, as needed. Some providers will give you an FSA debit card, which allows you to cover eligible expenses at the time of purchase. Otherwise, you'll pay the costs out-of-pocket and submit a claim to your FSA provider, along with the receipt for your purchase.
Use your money before the end of the year. You could lose the money in your FSA if you don't use it by Dec. 31. Some employers offer a grace period to use any excess funds. Others might allow you to roll over a portion of your FSA money — if your employer does, you can roll over only up to $640 for 2025.
Who qualifies for an FSA?
You may be eligible for an FSA if you are an employee of a company that offers this type of account. Your employer may have specific rules or eligibility criteria to qualify for an FSA. Not all employers offer flexible spending accounts.
A health care FSA can help you pay for medical expenses from year to year, such as regular over-the-counter medicine costs. It also allows you to plan ahead and put pre-tax dollars toward anticipated expenses.
What makes a product FSA-eligible?
The IRS determines what medical and health care expenses are covered by an FSA. In addition to costs such as over-the-counter meds and medically related upgrades to your home or car, this includes copays and deductibles charged to you over the course of a year.
It's important to spend all your allocated funds in your company-provided FSA within a calendar year. Unlike a health savings account (HSA), money in an FSA doesn't always roll over to the next year.
How much should you contribute to an FSA?
The first step in determining how much money to put into your FSA is to calculate your out-of-pocket medical expenses for that year. This can be tricky since you can't always anticipate illnesses and injuries. Looking back at the previous year's expenses is one way to try to calculate your out-of-pocket spending.
For 2024, the IRS has set the FSA annual contribution limit to $3,200 for individuals. So if you anticipate your monthly medical expenses will be $267 or more, it may be best to max out your FSA contributions in order to cover those expected costs with pre-tax dollars.
Conversely, if you expect your medical expenses will be lower, put less into your FSA so you don't wind up with a large amount of money at the end of the year that you’ll either need to spend on eligible expenses or forfeit.
Can I pay for my spouse's expenses from my FSA?
FSA funds can be used on eligible medical expenses for individuals, as well as their spouses and listed dependents. Your spouse can also contribute up to $3,200 to their FSA in 2024 to help cover family medical expenses.
Don't contribute more to individual FSAs than you and your partner think you'll need for costs like copayments, drugs or medical equipment. You can't pay for health insurance premiums with an FSA.
Pros and cons of an FSA
Pros
- Tax savings: You can reduce your taxable income and lower your tax bill by using pre-tax dollars to pay for eligible medical expenses.
- Convenience: FSAs can make it easier to budget for out-of-pocket health care costs.
- Employer contribution: Some employers may contribute to your FSA, providing additional funds to cover eligible expenses.
Cons
- Potentially losing funds: Unless your employer lets you roll over your FSA funds, you may lose whatever you don't spend by the end of the year.
- Reimbursement limitations: FSAs have strict eligibility requirements and may not reimburse you for all medical expenses, such as cosmetic procedures and certain over-the-counter medications.
- Fixed contributions: You have to estimate your FSA contribution before the beginning of the plan year. If you have unexpected medical expenses, you can't increase your contributions.
What's the difference between an FSA and an HSA?
FSAs and HSAs are both tax-advantaged accounts you can use to pay for eligible medical expenses. However, there are key differences to note.
- Eligibility: To qualify for an FSA, you must be an employee of a company that offers one. However, anyone with a high-deductible health plan, or HDHP, can open an HSA.
- Contribution limits: For 2024, you can contribute up to $3,200 for an FSA. For an HSA, you can contribute up to $4,150 (for individuals) and up to $8,300 (for family plans) for 2024.
- Pre-tax or after-tax contributions: You contribute pre-tax to an FSA, while you can contribute pre-tax or after-tax to an HSA.
- Rollover rules: With an FSA, you may forfeit the remainder of your funds at the end of the year, or if your employer lets you roll over funds, you can roll over a portion (for 2024, the maximum rollover limit is $640). HSAs don’t have this limitation. Instead, you can roll over the full amount from year to year.
- Investment options: You can invest your HSA funds to potentially grow your money even more — a benefit you can't explore with an FSA.
What is a Limited Purpose FSA (LPFSA)?
A limited purpose flexible spending account is a tax-advantaged savings account that allows you to pay for eligible dental and vision costs.
Like an FSA, an LPFSA can be opened only if it is provided by your employer. Unused funds earmarked for an LPFSA are also subject to being forfeited at the end of the plan year.
The difference between an FSA and LPFSA is that the latter can be paired with a health savings account to maximize pre-tax dollars set aside for health costs. While FSAs cover eligible medical expenses in addition to dental and vision costs, they can't be paired with an HSA account.
The bottom line
An FSA is a flexible spending account offered through employers to help employees save for health care costs. You contribute pre-tax to an FSA, and depending on your employer, you may be able to roll a portion of unused funds over for the next year to pay for eligible medical expenses.
FSAs can be a valuable benefit for budgeting the cost of medical expenses, but it’s important to understand the specific rules of your FSA and to plan accordingly to ensure that you use all of the funds in your account before the end of the plan year.
FAQs
At the beginning of the plan year, you decide how much you want to add to your FSA — up to $3,200 for 2024. Then, your employer will break this amount into regular installments that will be pulled from your paycheck, pre-tax, during the year. Your employer might also contribute to your flexible spending account.
For 2024, employees can contribute up to $3,200 to their health care FSA before taxes, through payroll deductions. If you’re married, your spouse can also contribute up to $3,200 to their own FSA through their employer. The 2025 contribution limits will likely be released in early December.
In general, you have to spend the money in your FSA account or you lose it at the end of the year. However, some employers offer a grace period that allows employees to spend FSA funds for a limited time after the end of the plan year. Some employers also let you carry over a portion of your funds into the following year. For 2024, you can roll over up to $640 in your FSA, if your employer offers this option.
