Yes, a flexible spending account (FSA) lets you set aside money before taxes are taken out

A flexible spending account is an employer-sponsored plan where you contribute money that your employer does not withhold income tax, Social Security tax, or Medicare tax from. You choose how much to set aside each year (up to a limit set by the IRS), and that money goes into an account you use to pay for may be able to access medical expenses. Because the money never gets taxed in the first place, you pay less in taxes overall.

The trade-off is that you must spend the money on may be able to access expenses within the plan year, or you lose it. There is no carryover to the next year (with a small exception for some plans). This is called the "use-it-or-lose-it" rule, and it is the main reason people hesitate to open an FSA.

Key Takeaways

  • FSA contributions are deducted from your paycheck before federal income tax, Social Security tax, and Medicare tax are calculated, lowering your total tax bill.
  • The IRS sets an annual contribution limit that changes each year; for 2024 it is $3,200, and for 2025 it is $3,300.
  • You can only use FSA money for specific medical expenses like copays, deductibles, prescriptions, and some over-the-counter items, not for general health or wellness.
  • Money left unspent at the end of the plan year is forfeited, though some employers offer a grace period or carryover of up to $640.
  • You enroll in an FSA during your employer's open enrollment period, usually once a year, and cannot change your election mid-year unless you have a may have access to life event.

How the pre-tax deduction actually saves you money

When you contribute to an FSA, the money comes out of your paycheck before your employer calculates your federal income tax. This means your taxable income for the year is lower. If you set aside $2,500 in an FSA and you are in the 22% federal tax bracket, you save roughly $550 in federal taxes alone. You also avoid paying Social Security tax (6.2%) and Medicare tax (1.45%) on that $2,500, which adds another $190 in savings.

The exact savings depend on your tax bracket and state income tax rate. Someone in a higher tax bracket saves more per dollar contributed. A self-employed person or someone without an employer plan cannot open an FSA—this benefit only exists through an employer.

What expenses you can actually pay for with FSA money

FSA funds cover a long list of medical expenses, but the IRS is strict about what counts. You can use the money for copays, coinsurance, deductibles, prescription medications, insulin, and medical equipment like crutches or wheelchairs. Dental work, vision care, and hearing aids are also covered. Some over-the-counter items may have access to too—pain relievers, allergy medicine, and antacids—but only if you have a prescription or a letter from your doctor saying you need them.

What does not count: cosmetic procedures, gym memberships, general vitamins (unless prescribed), toothpaste, sunscreen, and most wellness products. The IRS publishes a full list on its website, but when in doubt, ask your plan administrator before you spend the money.

The use-it-or-lose-it rule and how to avoid losing money

At the end of your plan year, any money left in your FSA is forfeited. You cannot roll it over to next year or get it back as a refund. This is the biggest drawback to FSAs, and it is why you need to estimate carefully how much medical spending you will actually have.

Some employers offer a grace period of up to 2.5 months after the plan year ends, giving you extra time to spend down your balance. A smaller number of employers allow you to carry over up to $640 to the next year (as of 2024). Check with your plan administrator to see if either option is available to you. If neither is, be conservative: it is better to contribute less and not use it all than to contribute too much and forfeit money.

How to enroll and when you can make changes

You enroll in an FSA during your employer's open enrollment period, which usually happens once a year in the fall for coverage starting January 1. You choose your contribution amount for the entire year, and that amount is deducted from each paycheck. Once the plan year starts, you cannot change your election unless you have a may have access to life event—marriage, divorce, birth of a child, loss of health coverage, or a significant change in medical expenses.

If you do have a may have access to event, you have 30 to 60 days (depending on your employer) to request a change. straightforward changing your mind is not enough. If you enroll and then realize you overestimated, you are stuck with that contribution for the year unless a may have access to event occurs.

FSA vs. Health Savings Account (HSA): which one is pre-tax

Both FSAs and HSAs use pre-tax dollars, but they work differently. An FSA is offered by your employer and has the use-it-or-lose-it rule. An HSA is paired with a high-deductible health plan and lets you carry money over year to year—it is more like a savings account. You can contribute to an HSA even if you are self-employed, but you cannot open an FSA without an employer plan.

If your employer offers both, you cannot use them at the same time. You have to choose one. An HSA is generally better if you want to save money long-term; an FSA is better if you have predictable medical expenses each year and want to lower your taxes now.

What happens if you leave your job

If you quit or are laid off, you lose access to your FSA. Any money left in the account stays with your former employer's plan—you cannot take it with you. This is another reason to be cautious about how much you contribute. Some employers offer COBRA continuation, which lets you keep your FSA for a limited time, but you have to pay the full premium yourself (your employer no longer subsidizes it).

If you move to a new job with an FSA, you can enroll in the new plan during that employer's open enrollment, but you start fresh with a new contribution amount and a new plan year. The money from your old FSA does not transfer.

Frequently Asked Questions

Can I use my FSA debit card for anything, or only medical expenses?

The debit card is restricted to may be able to access medical expenses. If you try to use it for something that does not may have access to, the transaction will be declined. Some cards require you to submit a receipt to prove the purchase was medical. Keep all receipts in case your plan administrator asks for proof.

What if I do not spend all my FSA money by the end of the year?

You lose it. The money does not roll over unless your employer offers a carryover option (up to $640) or a grace period (usually 2.5 months). Check your plan documents or ask your HR department whether either applies to you. If not, you forfeit the balance.

Can I open an FSA if I am self-employed?

No. FSAs are only available through employers. If you are self-employed, you can open a Health Savings Account (HSA) if you have a high-deductible health plan, and it also uses pre-tax dollars. You can also deduct medical expenses on your tax return, though the rules are different.

Do I have to enroll in an FSA every year?

No. Once you enroll, your election continues into the next year unless you cancel it or your employer ends the plan. However, you can change your contribution amount during open enrollment each year. If you do nothing during open enrollment, your contribution stays the same.

Can my spouse and I each have an FSA?

Yes, if you both have employers that offer FSAs. You each enroll in your own plan and set your own contribution limit. The limits are per person, not per household, so you can contribute up to $3,300 each (for 2025) if you both have access to a plan.