A flexible spending account (FSA) can be a great option if you want to save money on ever-rising healthcare costs. An FSA allows you to save for medical expenses and health insurance costs over the year so you can pay for them tax-free.
There were over 2.4 million flexible spending accounts at the end of 2021, according to a 2023 report based on the Employee Benefit Research Institute FSA database.
The Bureau of Labor Statistics estimates that 43% of private industry workers and 71% of state and government workers had access to an FSA in 2021.
What Is a Flexible Spending Account (FSA)?
An FSA is a tax-advantaged vehicle offered by employers that allows you to save money to pay for qualified health expenses. Your FSA is funded by payroll deductions and you don’t have to pay taxes on any funds that go into the account.
The funds accumulated in an FSA can be used to pay for medical expenses for yourself, your spouse, and your dependents within the year.
Key takeaways
- A flexible spending account (FSA) is a tax-advantaged way to save for future healthcare costs.
- You can use an FSA to pay copayments, deductibles, prescription drugs, and health costs.
- An FSA doesn’t allow you to use funds to pay your health insurance premiums but can go toward your deductible and coinsurance.
- FSA funds typically don’t carry over to future years.
How Does a Flexible Spending Account (FSA) Work?
Each employer decides precisely how its healthcare or medical FSA plan works. As a general rule, once you incur a medical expense, you use a debit card provided to you or use the system your employer has set up to submit a claim for reimbursement.
You may need to submit proof of the expense, such as a receipt, and include a statement that your health insurance plan didn’t cover the cost of the claim you are submitting.
Employers may provide a debit card for FSAs to make the process of paying expenses easier. However, even if you have this option, you must retain proof of the expenses you incur.
How To Use A Flexible Spending Account (FSA)
An FSA can be used to pay for many—but not all—health expenses you may incur over the course of a year. Such expenses may include:
- Copayments
- Health insurance deductibles
- Coinsurance
- Many prescription drugs
- Insulin
- Medical devices and equipment, such as crutches and blood sugar test kits
- Over-the-counter medicines
- Menstrual care products
As a general rule, you can use an HSA to pay for most medical and dental expenses that the IRS allows you to deduct from your taxes. IRS publication 502, Medical and Dental Expenses, has more details.
An FSA can’t be used to pay for a handful of medical expenses, such as:
- Health insurance premiums
- Long-term care coverage or expenses
- Expenses associated with another health plan
Pros and Cons of Flexible Spending Accounts (FSAs)
An FSA account comes with several pros and cons.
| Pros | Cons |
|---|---|
| You can save for and pay for healthcare expenses tax-free. | The amount you can contribute is less than in a health savings account (HSA). |
| You don’t need to have a high-deductible health plan to participate. | You lose money if you don’t use the contributions to pay for qualified health expenses within the plan year. |
| The plan is easy to use—just follow your employer’s instructions. | You can’t grow FSA contributions by investing them in stocks. |
FSA vs. HSA
Flexible spending accounts (FSAs) and health savings accounts (HSAs) are both vehicles that allow you to pay for medical expenses with tax-free money, but FSA vs. HSA has some key differences.
An FSA is an employer-based account where you can contribute money (a maximum of $3,200) to pay for medical expenses you incur within a period, depending on your employer’s rules. You lose the money if you don’t use the funds within that time frame.
By contrast, an HSA lets you save for long-term healthcare costs. It’s also portable, so you can take it with you to another company. Contribution limits for HSAs are higher—for 2024, the limits are $4,150 for self-only coverage and up to $8,300 for family coverage—and you can carry the money over from year to year.
Many HSA plans also allow you to put some of your money in the stock market to grow the account. However, you must have a high-deductible health insurance plan (HDHP) to contribute to an HSA.
Types of FSAs
There are other savings accounts beyond healthcare FSAs that have more limitations for how you can use the funds.
| Type of FSA | What it covers |
|---|---|
| Healthcare FSA | Healthcare costs like copays, deductibles, prescriptions, and over-the-counter medications. |
| Dependent Care FSA | Care for dependents, including daycare and senior day care. |
| Limited Purpose FSA (LP-FSA) | Dental, vision, and preventive care costs until reaching your deductible. After that, it covers qualifying health costs. |
| Post-deductible FSA | Vision and dental costs until you reach your policy’s deductible, then any qualifying health costs. |
Healthcare FSA
You can contribute tax-free money to a healthcare FSA to pay for many types of healthcare and health insurance costs. Costs you can pay for include health insurance deductibles, coinsurance, copays, prescription drugs, and over-the-counter drugs. However, you can’t carry over money, and you lose any money you don’t use.
Dependent Care FSA
A dependent care FSA allows you to pay for the care of your children under age 13 or for adult dependent care expenses using tax-free money. Expenses typically must be tied to care provided while you or your spouse are working, looking for work, or attending school full-time. Such expenses may include:
- Day care
- Preschool
- Senior day care
- Summer camp
Limited Purpose FSA (LP-FSA)
An LP-FSA is limited to dental, vision, and preventive care costs. After reaching your deductible, you can also use it for eligible expenses found in a healthcare FSA. You can contribute up to $3,200 to an LP-FSA, and some plans allow for carrying over a portion of funds to the next year.
Post-Deductible FSA
A post-deductible FSA works like an LP-FSA but starts covering vision and dental costs after you reach your policy’s deductible. Afterward, FSA funds can be used to pay for any qualifying healthcare costs.
