What Is a Flexible Spending Account (FSA) and Should You Use One?

What Is a Flexible Spending Account (FSA) and Should You Use One?

An FSA sounds like a good deal on the surface: pay for medical expenses with pre-tax dollars and keep more of your paycheck. But there's a catch that trips up a lot of people — and if you don't understand it, you could lose the money entirely.

Here's what a Flexible Spending Account actually is, how it works, and how to decide whether it makes sense for you.

What an FSA Is

A Flexible Spending Account is an employer-sponsored benefit that lets you set aside a portion of your paycheck — before taxes — to pay for eligible medical expenses. The money goes into your FSA at the start of the year, and you use it throughout the year to cover things like doctor copays, prescription drugs, dental work, vision care, and a wide range of over-the-counter products.

The tax savings are real. If you're in the 22% federal tax bracket and contribute $2,000 to an FSA, you save $440 in federal taxes alone — before state taxes or FICA are factored in.

How an FSA Works

You elect your FSA contribution during open enrollment, typically in the fall for the following calendar year. Once you set your contribution amount, it's deducted from your paycheck in equal installments throughout the year.

One unusual feature: the full annual amount is available to you on January 1, even if you haven't contributed it yet. If you elect $1,800 for the year and have a $1,800 dental bill in February, you can pay it with your FSA — even though only two months of contributions have come out of your paycheck.

You pay for eligible expenses using an FSA debit card or by submitting receipts for reimbursement.

The Catch: Use It or Lose It

This is the part people miss. FSA funds don't roll over the way a savings account does. If you don't spend the money by the end of the plan year, you forfeit it. It goes back to your employer.

Some employers offer a grace period — typically 2.5 months after the plan year ends — during which you can still spend the remaining balance. Others allow a rollover of up to $640 (as of 2024) into the following year. But many plans offer neither. You need to read your plan documents carefully.

This use-it-or-lose-it rule is why FSAs require planning. Contributing more than you'll spend is a mistake that costs you real money.

What FSA Funds Can Pay For

The list of eligible expenses is broader than most people realize. FSA funds can be used for:

  • Doctor and specialist copays
  • Prescription medications
  • Dental care, including cleanings, fillings, and orthodontia
  • Vision care, including glasses, contacts, and eye exams
  • Over-the-counter medications (cold medicine, pain relievers, allergy medicine)
  • Menstrual care products
  • Bandages, first aid supplies, and medical equipment
  • Mental health services
  • Physical therapy and chiropractic care

FSA funds cannot be used for cosmetic procedures, gym memberships, vitamins (unless prescribed), or insurance premiums.

FSA vs. HSA: What's the Difference?

Both accounts let you use pre-tax dollars for medical expenses, but they work differently in important ways.

An HSA — Health Savings Account — is only available if you have a high-deductible health plan. An FSA is available with most employer health plans, including lower-deductible plans. HSA funds roll over indefinitely and can be invested; FSA funds do not roll over (with limited exceptions). HSAs can follow you from job to job; FSAs generally cannot.

If you have access to an HSA, it's typically the better long-term vehicle. But if your health plan isn't HSA-eligible, an FSA is the next best option.

How Much to Contribute

The 2024 FSA contribution limit is $3,200. For most people, the right amount is whatever you're confident you'll actually spend — not the maximum.

Start by estimating your known medical expenses for the year: regular prescriptions, planned dental work, annual eye exam and new glasses, therapy copays. Add a small buffer for unexpected expenses. That's your target number.

Contributing more than you'll spend means losing money to the forfeiture rule. Contributing less than you'll spend means you're leaving tax savings on the table. The goal is to estimate accurately.

Should You Use One?

If your employer offers an FSA and you have predictable medical expenses, the answer is almost always yes. The tax savings are immediate and guaranteed — you're essentially getting a discount on every eligible purchase.

The only reason to skip it is if your medical expenses are genuinely unpredictable, you have trouble estimating costs, or your employer's plan has no grace period or rollover provision and you're worried about forfeiting funds.

For most people with regular prescriptions, annual dental cleanings, or any ongoing healthcare costs, an FSA pays for itself in the first month.

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