This article is general information, not insurance, tax, medical, legal or financial advice. Rules for these accounts differ by country, by employer and from year to year, so treat the descriptions below as concepts and check your own plan documents for the details that apply to you.
What a flexible spending account is
A flexible spending account, often shortened to FSA, is a benefit that an employer offers so employees can set aside part of their pay for certain costs. The most common version is a health FSA, which is used for medical, dental and vision costs that insurance does not pay. Related accounts exist for other purposes, such as dependent care, but this article focuses on the health version.
The main appeal is tax treatment. In many systems, money you contribute is taken from your pay before income tax is calculated, which can lower your taxable income. The exact tax rules are set by governments and change, so the size of any benefit depends on your situation and where you live.
An FSA belongs to the employer’s benefit plan rather than to you personally. That single fact explains most of its quirks, including why it usually does not follow you to a new job.
How the money goes in
Most employers let you choose a yearly amount during open enrollment. You make that choice before the plan year begins, and the amount is then taken from your paychecks in roughly equal pieces.
As a hypothetical example, suppose you choose $1,200 for the year and are paid 24 times a year. Each paycheck would carry a $50 contribution, since $1,200 divided by 24 is $50. These numbers are made up for illustration and are not a recommendation.
Governments often set a ceiling on how much can be elected in a year, and employers may set a lower one. Those limits vary and are updated over time, so look at your plan’s current figures instead of relying on a number you read elsewhere.
Access to the full amount early
Many health FSAs work in a way that surprises people. The full yearly election is often available from the first day of the plan year, even though your paychecks have only funded a small part of it so far. If you have an expensive appointment in month one, you may be able to use money you have not yet contributed.
The flip side is that the employer is taking on some risk. If you leave the job before you have contributed the whole amount, you typically do not pay the difference back. That is part of how the account is designed, but it is also why an FSA is tied so closely to employment.
The use-it-or-lose-it idea
The best-known feature of an FSA is that unused money may be forfeited at the end of the plan year. This is the use-it-or-lose-it idea. If you elect $1,200 and only spend $900 on eligible costs, the remaining $300 might go back to the employer’s plan instead of back to you.
Plans are allowed to soften this rule in a few ways, and each employer chooses whether to do so:
- A grace period. A short stretch after the plan year ends, during which you can still spend the old year’s balance.
- A limited carryover. A capped amount of unused money that moves into the next plan year.
- A claims deadline. A window after the year ends to submit receipts for costs you already had.
A plan generally offers either a grace period or a carryover, not both, and some offer neither. Your benefits summary or plan documents should say which applies. Because the rules vary, it is worth reading them before you decide how much to elect.
Choosing an amount conservatively
Since leftover money may be lost, many people aim to elect an amount they are fairly confident they will spend. Costs that tend to be predictable include:
- Regular prescription drugs that you refill every month
- Routine dental or vision visits and the glasses or lenses you already know you need
- Recurring therapy visits or other scheduled care
- Copays and out-of-pocket costs you have had in previous years
Looking at last year’s explanation of benefits statements and bills can give you a rough sense of your usual spending. Surprises can still happen in either direction, so any estimate is uncertain. Choosing a smaller number is the more cautious approach if you are unsure.
Changing your election mid-year
Once the plan year starts, the election is usually locked. Changes are generally allowed only after certain qualifying life events, such as marriage, the birth or adoption of a child, or a change in employment status that affects coverage. Even then, the change usually has to be consistent with the event. A new job offer or a bad month of expenses typically does not count.
If you miss the election window at open enrollment, you often cannot sign up until the next one, apart from new hire enrollment when you first join a company.
Getting reimbursed
There are two common ways to use the money. Some plans give you a debit card that pays at the point of sale. Others ask you to pay first and then submit a claim with proof of the expense. Even with a card, the plan may later ask for documentation to confirm that a purchase qualified, so keep your receipts and statements.
Reimbursement is only for costs that the plan treats as eligible, and you generally cannot use the same expense twice, once through insurance and again through the FSA. The FSA covers what you actually paid out of your own pocket after insurance.
How an FSA fits with other accounts
Other accounts sit nearby and are easy to confuse. A health savings account, for example, is individually owned and typically requires a particular kind of plan, usually one of the high-deductible plans. A health reimbursement arrangement is funded by the employer and has its own rules. Some employers also add money to accounts, which is a separate topic from your own payroll contributions.
Often the rules about which accounts you can combine are restrictive, so having one account can limit your options for another. If you are comparing choices, read the plan details instead of assuming that they can all be stacked.
Questions worth asking your benefits team
- What is the yearly limit at this employer, and what is the plan year?
- Is there a grace period, a carryover, or neither?
- By what date must claims be submitted after the year ends?
- What happens to my balance if I leave the job?
- Which expenses does the plan treat as eligible?
An FSA can be a practical way to pay for expected costs, but it works best when your spending is predictable and you understand the deadlines. Outcomes depend on your own use, and no particular amount is right for everyone.