What Is an FSA and How Does It Work?

In brief Flexible spending accounts, often called FSAs, are provided and owned by your employer, and you typically sign up during an open enrollment period. FSA funds can be used for a variety of expenses, including for your own qualified medical expenses, as well as for any qualified expenses for your spouse and dependents. An FSA differs from an HSA. With FSAs, you must “use it or lose it” before the funds are forfeited. Funds in health-savings accounts roll over from year to year if they aren’t spent, and stay with you if you leave your employer. You might be eligible for a health-care FSA, limited-expense FSA or dependent-care FSA. If you are starting a new job or going through open enrollment, you might see an option to open an FSA. While it makes sense for some people to put aside money pretax to spend on qualified expenses, the accounts aren’t right for everyone.

What is an FSA? FSA stands for flexible spending account. Depending on the type of FSA your employer offers, the account can be used for qualified medical, dental or vision expenses, or for qualified dependent-care services such as preschool or after-school programs. The annual amount you contribute to the account is deducted from your salary before income taxes. But FSAs, unlike HSAs—health savings accounts—often expire at the end of the year, so any contribution you don’t use goes to your employer.

How does an FSA work? You typically sign up for an FSA when you start a new job or during your employer’s open enrollment period. To decide if you should open an FSA, you should take stock of your medical expenses from the prior year, says Marsha Barnes, founder of The Finance Bar, a service that promotes financial wellness for women and couples.

Learn which expenses would qualify for using FSA funds, and learn the contribution limits. For 2021, you cannot contribute more than $2,750 to a health-care or limited-expense FSA, according to the IRS. You can contribute up to $5,000 in a dependent-care FSA if you are part of a married couple filing jointly or a single parent, or up to $2,500 if you are part of a married couple filing separately.

What can I use my FSA for?

FSA funds can be used for a variety of expenses, including for your own qualified medical expenses, as well as for any qualified expenses for your spouse and dependents. The IRS has a list of approved expenses here, but if you have any questions you should contact your employer’s benefits provider. You can pay for these expenses with a debit card provided by your employer or by filing for reimbursement. Here are some examples of expenses commonly covered by FSAs:

Aspirin and other pain relievers Prescription eyeglasses and contact lenses Orthodontia, including braces and retainers Menstrual care products Over-the-counter medications What if I leave my job? If you lose or leave your job, you typically have 30 to 60 days to submit receipts for qualified expenses you or your family members incurred prior to or on the last day of your employment, says Roy Ramthun, a consultant who specializes in high-deductible plans and HSAs. The exact amount of time you have depends on your employer, but any expenses incurred after your job ends are not eligible for reimbursement, and any unspent funds are generally “left behind” to the benefit of the employer, Mr. Ramthun says.

What is a dependent-care FSA? You can contribute pretax dollars to this account for qualified child- and adult-care expenses. Dependents are defined as children under the age of 13 and adults who can’t physically or mentally care for themselves. Some examples of qualified expenses include day care, preschool and elder-care services.

What is a limited-expense health-care FSA? If you have an HSA, you might be eligible to enroll in a limited-expense health-care FSA. These can only be used to pay for qualified dental and vision expenses.

Do FSA funds expire?

Unused FSA funds go back to your employer at the end of the year, though employers do have the choice of giving you a two and a half month grace period to submit qualified expenses from the previous year or carry over $550 from one year to the next.

Lamar Watson, a certified financial planner and founder of Dream Financial Planning LLC, says it is better to contribute less than to put in too much money. “You’re going to feel better if you just have to come out of pocket for 200 bucks at the end of the year versus if you have $1,000 in a flex spending account and you don’t have anything to spend it on,” he says.