What Is an FSA?

A flexible spending account lets you use pretax money to pay for health or dependent care expenses.

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A flexible spending account, or FSA, is a tax-advantaged account offered by your employer that allows you to pay for medical expenses or dependent care.

Depending on the extent of your health care or dependent care costs, an FSA can help you save a lot of money on taxes, particularly since the list of eligible expenses has expanded in recent years.

But if you contribute more than you spend, an FSA can backfire: Any unused funds may disappear if your employer doesn't roll them over.

Here’s more about what FSAs are, whether you should get one and how to use one wisely.

What is a flexible spending account, or FSA?

Also called a flexible spending arrangement, an FSA (not to be confused with an HSA) can be used to cover certain expenses with pretax money. A health care FSA can be used for medical expenses, over-the-counter items, dental care and vision care, while a dependent care FSA can be used for services like preschool, summer day camp and day care for a child or dependent adult.

The amount you decide to contribute to the account for the year is deducted from your salary before income taxes. This deduction reduces your taxable income, saving you money on taxes. Depending on your benefit plan, your employer may contribute to your FSA as well.

You’ll have to submit receipts and documentation for reimbursement, or you may have a debit card to pay for expenses as you go. (This setup is common for health care FSAs.) You can use your FSA for your own expenses or expenses incurred by your spouse or any dependents you claim on your taxes. You can also use health care FSA funds for any adult children on your health insurance plan that will be 26 or younger on Dec. 31.

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You may also have the option of a limited-purpose FSA, which can be used in conjunction with a health savings account, or HSA. A limited-purpose FSA can cover certain dental and vision care expenses, while an HSA can cover broader health care costs.

Do you need an FSA?

A health care FSA can be useful for people with any level of health costs. If you have predictable, ongoing medical expenses during the year, or regular over-the-counter spending, using pretax dollars for those costs lowers your bottom line.

Dependent care FSAs are useful if you're paying for care for a child or dependent adult while you work. A vast majority of parents (85%) report that they're spending 10% or more of their household income on child care, according to a recent Care.com survey — so to the extent that you can pay some of that money pretax, that's an advantage.

To decide if an FSA is right for you, take stock of your health and dependent care spending. If you have any ongoing or expected medical needs you might have to pay for in the upcoming year, an FSA is a great use of your money. The funds can also be used for over-the-counter items such as allergy and sinus drugs, first-aid supplies, digestive health products and home COVID-19 tests. A dependent care FSA can be used for day care and preschool expenses, but also for things like summer day camp and after-school programs.

How to use a health care FSA

While you can’t use your health care FSA for insurance premiums, you can use it for copayments, coinsurance, deductibles, prescription medications, over-the-counter drugs, menstrual products and dental and vision care.

Health care FSAs can be used toward medical equipment, treatments and over-the-counter items such as:

  • Medicines prescribed by a doctor.

  • Blood sugar testing supplies.

  • Birth control.

  • Cold and flu medicine.

  • Breast pumps.

  • Pregnancy tests.

  • Menstrual pads and tampons.

  • Insulin.

  • Bandages.

  • Crutches.

  • Reading glasses.

  • Acupuncture.

  • Pain relief drugs.

  • Sunscreen.

  • Chiropractors.

  • Psychological treatment.

  • Smoking cessation programs.

You can’t use your health care FSA to pay for CBD products, vitamins (unless they're prenatal) or cosmetic procedures. In some instances, such as for orthopedic shoes or nutritional counseling, you may need a doctor’s referral to prove you really need the covered treatment. For a full list of covered treatments and rules, check your plan's documentation.

How to use a dependent care FSA

You can use your dependent care FSA for expenses connected to work-related care of children under age 13 or adult dependents who can’t care for themselves. Eligible expenses may include:

  • After-school programs.

  • Babysitting (work-related).

  • Day camp.

  • Nanny.

  • Nursery school.

  • Preschool.

  • Adult or senior day care.

You can't use dependent care FSA money to pay for tutoring, sleep-away camp or school tuition.

Determine your annual FSA contribution

During open enrollment, you decide how much you plan to allocate to your FSA.

Health care FSA

You can contribute up to $2,850 in 2022, but you can adjust your amount only during open enrollment or if you have a qualifying event, such as getting married or having a child. Your spouse can also contribute up to $2,850 if they have their own employer-sponsored health care FSA. Employers can also contribute to an employee’s health care FSA, and their contribution doesn’t count toward IRS limits.

Carefully read through the details of your employer-offered health insurance to learn about the cost of copays and coinsurance. If you have any underlying conditions, such as asthma or diabetes, factor in how much you’ll pay for your medications. Then consider your other needs as well. For example, you could use funds for dental or vision care (including copays), plus a wide variety of over-the-counter items.

Dependent care FSA

You can contribute up to $5,000 to a dependent care FSA if you file taxes as an individual or as a married couple filing jointly, or up to $2,500 if you’re married filing separately. This limit applies to married couples as a unit, so a married couple can contribute only up to $5,000 total. Any employer contribution counts toward IRS limits.

FSA balances will expire

FSAs are “use or lose,” meaning the amount in your account will expire at the end of the year. However, employers do have options to prevent employees from losing any funds remaining at year’s end. With both dependent care and health care FSAs, employers can offer a grace period of 2.5 months into the following year to spend any leftover funds. With a health care FSA only, employers can allow you to carry over up to $570 from 2022 to the following year. Employers can offer either option for a health care FSA, but not both.

The bottom line

There’s no one-size-fits-all approach when it comes to flexible spending accounts. To decide if an FSA is right for you, forecast upcoming health and dependent care expenses for the year, plus general drugstore-item spending, and become familiar with the FSA plans being offered. Read the rules for your company’s offerings to understand what they cover, and ask your benefits department for help if you need it.