FSA Rules for Eligible Expenses and Savings

An FSA can reduce the amount of pay subject to federal income and payroll taxes, but the savings come with a deadline many workers underestimate. If you contribute more than you can use, your employer’s plan rules may require you to forfeit the leftover money. The best approach is to understand what your account covers before choosing an annual contribution amount.

What Is an FSA?

A flexible spending account, usually called an FSA, is an employer-sponsored account that lets you set aside money from your paycheck for certain expenses. Most people mean a health FSA, which can reimburse eligible medical, dental, vision, prescription, and over-the-counter costs.

Your payroll contributions generally come out before federal income tax and Social Security and Medicare taxes are calculated. That means an FSA does not create a separate deduction you claim on Form 1040. Instead, the tax benefit happens throughout the year as your employer withholds less taxable pay.

Employers may also offer a dependent care FSA. This is a separate account used for qualifying child care or adult dependent care expenses that allow you and, if married, your spouse to work or look for work. Eligibility rules differ from those for a health FSA.

FSA Eligible Expenses: What Can You Use It For?

A health FSA can reimburse expenses that are primarily for preventing or treating a medical condition. Common examples include doctor and dentist visits, prescription drugs, copays, eyeglasses, contact lenses, hearing aids, and certain medical supplies. Many over-the-counter items also qualify, including pain relievers, allergy medicine, bandages, and menstrual care products.

The expense must generally be incurred during the period your FSA coverage is active. Buying an item before your coverage begins or trying to use current funds for an old bill can cause a claim to be denied.

Not every health-related purchase qualifies. General wellness costs, such as gym memberships, vitamins taken for overall health, cosmetic procedures, and most toiletries, are usually not eligible. An item that has both medical and personal uses may require a letter of medical necessity or may qualify only in specific circumstances. Keep receipts and any supporting paperwork, especially for higher-cost claims.

A dependent care FSA may cover daycare, preschool, before- and after-school care, day camp, and care for a qualifying dependent adult. Overnight camps, school tuition for kindergarten and higher grades, and costs paid while you are not working usually do not qualify. If you are married, filing separately can also limit or prevent use of this benefit.

How Much Should You Put in an FSA?

Your employer sets an enrollment period, often during open enrollment, when you elect how much to contribute for the coming plan year. The IRS sets annual limits for health FSAs, but the limit can change from year to year. Your employer may set a lower limit, so review the current plan materials rather than relying on an older amount.

Estimate predictable out-of-pocket expenses first. Review last year’s pharmacy, dental, vision, and appointment costs, then consider planned treatment such as braces, new glasses, surgery, or therapy. Do not include amounts you expect insurance to pay.

A health FSA has one helpful feature: the full annual amount you elect is generally available at the start of the plan year, even though contributions are taken from paychecks over time. That can help when you have a large eligible expense early in the year. A dependent care FSA works differently, because reimbursement is generally limited to the amount already contributed to the account.

Do FSA Funds Expire?

This is the rule that deserves the most attention. Health FSA funds are commonly subject to the use-it-or-lose-it rule. However, an employer may offer one of two forms of relief: a limited carryover of unused funds into the next plan year or a grace period that gives you extra time to incur eligible expenses. An employer generally cannot offer both for the same health FSA.

Some plans also provide a run-out period. This does not extend the time to make purchases. It only gives you additional time to submit claims for expenses that occurred before the plan year ended.

Check your summary plan description for the exact deadlines, carryover amount, and reimbursement procedures. These details are determined by the employer’s plan and may change from one year to the next.

FSA and HSA Rules Are Not the Same

A health FSA is not the same as a health savings account, or HSA. Only eligible people covered by a qualifying high-deductible health plan can have an HSA, and unused HSA money generally stays in the account year after year. Health FSA funds usually do not.

You also generally cannot contribute to a standard health FSA and an HSA at the same time. Some employers offer a limited-purpose FSA for dental and vision expenses, which may be compatible with HSA eligibility. If you are considering an HSA, verify the FSA type before enrolling.

Before open enrollment closes, make a conservative estimate, read your plan’s deadline rules, and save documentation for every claim. A carefully chosen FSA election can turn expenses you already expect to pay into meaningful tax savings without leaving money behind.