What is an FSA and How Does It Work

A Flexible Spending Account, or FSA, is a benefit offered by many employers that lets workers set aside pre-tax money to pay for healthcare costs. Instead of paying for medical expenses with after-tax dollars, you contribute money directly from your paycheck before taxes are taken out. This means you pay less in federal income taxes and Social Security taxes, which can save you money throughout the year.

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Here's how the process works in basic terms: You decide how much money you want to contribute to your FSA during your employer's open enrollment period, which typically happens once per year. That amount is divided equally across all your paychecks for the year. When you have a covered medical expense, you pay for it out-of-pocket and then submit a claim to your FSA administrator for reimbursement. The administrator reviews your claim and sends you the money back.

According to the U.S. Bureau of Labor Statistics, about 40% of workers at private companies have access to FSA plans through their employers. The average FSA contribution is around $2,700 per year, though this varies widely depending on individual needs and circumstances. Some workers contribute less if they have minimal medical expenses, while others contribute more if they expect significant healthcare costs.

One important feature of FSAs is the "use-it-or-lose-it" rule. This means that money you contribute must generally be used by the end of the plan year or you forfeit it. However, some plans allow a grace period of up to 2.5 months after the year ends, or a small carryover of up to $610 (as of 2024) to the next year. This rule makes planning important—you need to estimate your healthcare costs reasonably accurately to avoid leaving money on the table.

Practical Takeaway: Before deciding whether to contribute to an FSA, estimate your expected medical, dental, and vision expenses for the coming year. This might include doctor visit copays, prescription medications, glasses, and dental cleanings. A realistic estimate helps you choose a contribution amount that you'll actually use.

Common Medical Expenses Covered by FSAs

FSAs cover a wide range of medical expenses that you might not realize are included. The Internal Revenue Service (IRS) maintains a detailed list of what counts as a medical expense for FSA purposes. Many of these expenses are everyday healthcare costs that people pay for regularly.

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Prescription medications are among the most common FSA-covered expenses. This includes both brand-name and generic medications prescribed by a doctor. However, over-the-counter medications like cold medicine, pain relievers, and allergy tablets are generally not covered unless your doctor writes a prescription for them (as of 2020, the rules changed to allow some over-the-counter medications with prescriptions, but this varies by plan).

Dental care expenses are covered, including regular cleanings, fillings, root canals, crowns, and orthodontic treatment like braces. A person who pays $1,200 per year for ongoing orthodontic treatment could put that entire amount into an FSA and reduce their taxable income. Vision care is also included—glasses, contact lenses, contact lens solution, and eye exams all qualify. Hearing aids and related expenses are covered as well.

Doctor visits and medical procedures qualify for FSA reimbursement, including the copay amounts you pay at the time of service. Mental health services, including therapy and counseling, are covered. Preventive care like annual physicals and vaccinations can be covered, though some preventive care may have different cost-sharing rules under your specific plan.

Medical equipment and supplies also qualify. This includes items like blood glucose monitors and test strips for people with diabetes, blood pressure monitors, thermometers, bandages, pain relief patches, and compression stockings. If your doctor prescribes an item for medical reasons, there's a good chance it qualifies for FSA coverage.

Practical Takeaway: Review your medical, dental, and vision bills from the past year. Add up costs you paid out-of-pocket, then subtract anything that might not be covered. This total gives you a realistic starting point for deciding how much to contribute to an FSA.

Expenses That Are NOT Covered by FSAs

Just as important as knowing what's covered is understanding what FSAs cannot reimburse. Many common health-related products are not eligible, even though they might seem medical in nature. Knowing these restrictions helps prevent submitting claims that will be denied and wasting money on expenses you can't get reimbursed for.

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General health and wellness products are not covered. This includes vitamins and dietary supplements unless prescribed by a doctor for a specific medical condition. Protein powders, fitness equipment, gym memberships, and nutritional products bought for general wellness don't qualify, even if they support your overall health. Similarly, cosmetic procedures and products—including teeth whitening, cosmetic surgery, or skincare products for appearance—are not covered.

Hygiene products are mostly not covered. Toothpaste, soap, shampoo, deodorant, and similar personal hygiene items cannot be reimbursed, even though they relate to health. However, certain medical-grade products may qualify if prescribed—for example, a medicated shampoo prescribed for a scalp condition might be covered, but regular toothpaste is not.

Some seemingly medical items are also excluded. Insurance premiums cannot be paid with FSA funds (though there are separate accounts for this, like Health Savings Accounts). Maternity clothes are not covered, though medical expenses related to pregnancy and childbirth are. Over-the-counter medications without a prescription are generally not eligible. Non-prescription reading glasses or sunglasses are not covered, but prescription eyeglasses are.

Travel expenses for medical care are not covered, such as airfare or hotel costs to reach a treatment facility, even if the treatment itself is medically necessary. Long-term care services and nursing home care have limited or no coverage under most FSA plans. Cosmetic dental work like veneers or teeth bleaching for appearance is not covered, but dental work done for functional reasons is.

Practical Takeaway: When considering whether to include an expense in your FSA contribution estimate, ask: "Is this something a doctor prescribed or medically necessary for treating a condition?" If the answer is no, it likely won't be covered. Keep this question in mind when deciding your contribution amount.

How to Submit Claims and Get Reimbursed

Understanding the claims process helps you access the money you've set aside. The process varies slightly depending on your FSA administrator and employer plan, but the basic steps are similar across most plans. Most FSAs today offer multiple ways to submit claims, making it easier than in the past when everything required paper forms.

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The simplest method for many people is using a debit card provided by their FSA administrator. This card works like a regular debit card but can only be used for FSA-covered expenses. You present it at pharmacies, doctor offices, or medical supply stores, and the expense is paid directly from your FSA account. No claim submission is needed. However, not all providers accept FSA debit cards, so this method doesn't work for every situation.

For expenses not paid with the FSA debit card, you submit a claim through the administrator's website or mobile app. This typically involves uploading a receipt or explanation of benefits (EOB) from your healthcare provider or pharmacy. The process usually takes a few minutes—you take a photo of your receipt with your phone, upload it through the app, and submit. Within a few business days to a couple of weeks, the money is deposited into your bank account or reimbursed to your original payment method.

Paper claim forms are still available from most FSA administrators, though they take longer to process. You fill out the form, attach receipts, and mail it to the administrator. This method can take two to four weeks for processing and reimbursement. Some administrators also allow phone-based claims or faxed submissions.

Keep organized records of all your FSA-covered expenses and receipts. Your FSA administrator may ask for documentation to verify that an expense is actually covered before reimbursing it. Keeping receipts and explanations of benefits in a folder or saved digitally makes this process straightforward if questions arise. Most FSA administrators provide an online account where you can see your balance, view submitted claims, and track reimbursements.

Practical Takeaway: