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What Is a Flexible Spending Account and How Does It Work?

This tax-advantaged healthcare account lets you put pre-tax dollars toward certain healthcare costs.

Juan Moyano / Getty Images

A flexible spending account is a healthcare fund offered by employers. It allows you to set aside pre-tax dollars for eligible healthcare expenses. With an FSA, you can reduce your taxable income while also paying for necessary medical costs. 

But flexible spending accounts have specific rules you must follow, such as an annual contribution limit and a limited amount of time to use your funds. Here’s everything you need to know to ensure you get the most out of your coverage.

What is a flexible spending account?

An FSA is a tax-advantaged account that lets you contribute and use pre-tax dollars to pay for eligible medical expenses. You don’t need any specific type of health plan to qualify for an FSA, but your employer must offer one in order to enroll.

When you sign up for an FSA, you declare your contributions for the year. Your FSA is then prefunded on the first day of the plan, and your contributions are broken down into installments that your employer will automatically withdraw from your paycheck, pre-tax.

FSAs can be an effective way to pay for health expenses such as:

  • Birth control
  • Crutches
  • Eyeglasses and contact lenses
  • Insulin
  • Over-the-counter drugs
  • Pregnancy tests
  • Prescribed medicines
  • Psychological treatment

The IRS offers a more comprehensive list of eligible medical expenses. Note: You can’t use your FSA to pay for insurance premiums.

There are three main types of FSAs, outlined below:

Type of FSAWhat it coversMaximum contribution
Health Care FSA or HCFSAAny eligible medical costs, like medical devices or prescriptions$3,050
Limited Health Expense Health Care FSA, or LEX HCFSAAny eligible dental and vision expenses$3,050
Dependent Care FSAAny child or adult dependent care expenses$5,000 per household or $2,500 if married but filing separately

How does an FSA work?

A flexible spending account can help you plan for predictable medical expenses -- and sometimes unexpected costs -- throughout the year. Here’s what to expect if you sign up for an FSA:

Choose how much to contribute. At the beginning of the plan year, when you’re enrolling in your benefit plans, you’ll decide how much money you want to put in your FSA for the year. In some cases, employers may also contribute to flexible spending accounts. In 2023, the maximum amount an employee can contribute to an FSA is $3,050. 

Your plan begins. The amount you designate for the year is available in full on the first day of the year. Your employer will then take contributions out of your paycheck in equal installments each pay period. Your employer may also contribute to your account.

Spend your money or submit a claim, as needed. Some providers will give you an FSA debit card which allows you to cover eligible expenses at the time of purchase. Otherwise, you’ll pay the costs out-of-pocket and submit a claim to your FSA provider, along with the receipt for your purchase.

Use your money before the end of the year. You could lose the money in your FSA if you don’t use it before Dec. 31. Some employers offer a grace period to use any excess funds. Others might allow you to roll over a portion of your FSA money -- if your employer does, you can only roll over up to $610 for 2023.

Who qualifies for an FSA?

You may be eligible for an FSA if you are an employee of a company that offers this type of account. Your employer may have specific rules or eligibility criteria to qualify for an FSA. Not all employers offer flexible spending accounts.

A healthcare FSA can help if you have predictable medical expenses from year to year, such as regular over-the-counter medicine costs. An FSA allows you to plan ahead and put pre-tax dollars towards this expense.

Pros and cons of an FSA


  • Tax savings. You can reduce their taxable income and lower your tax bill by using pre-tax dollars to pay for eligible medical expenses. This reduces your taxable income, which can save you money in taxes.

  • Convenient. FSAs can make it easier to budget for out-of-pocket healthcare costs.

  • Employer contribution. Some employers may contribute to your FSA, providing additional funds to cover eligible expenses.


  • You could lose your funds if you don’t spend them. Unless your employer lets you rollover your FSA funds, you may lose whatever you don’t spend by the end of the year.

  • Reimbursement limitations. FSAs have strict eligibility requirements and may not reimburse you for all medical expenses, such as cosmetic procedures and certain over-the-counter medications.

  • Contributions are fixed. You have to estimate your FSA contribution before the beginning of the plan year. If you have unexpected medical expenses, you can’t increase your contributions.

What’s the difference between an FSA and an HSA?

A flexible spending account and health savings account are both tax-advantaged accounts you can use to pay for eligible medical expenses. However, there are key differences to note:

  • Eligibility. To qualify for an FSA, you must be an employee of a company that offers one. However, anyone with a high-deductible health plan, or HDHP, can open an HSA.
  • Contribution limits. For 2023, you can contribute up to $3,050 for an FSA. For an HSA, you can contribute up to $3,850 (for individuals) and up to $7,750 (for family plans) for 2023.
  • Pre-tax or after-tax contributions. You contribute pre-tax to an FSA, while you can contribute pre-tax or after-tax to an HSA. 
  • Rollover rules. With an FSA, you may forfeit the remainder of your funds at the end of the year, or if your employer lets you roll over funds, you can rollover a portion (for 2023, the maximum rollover limit if $610). HSAs don’t have this limitation. Instead, you can roll over the full amount from year to year. 
  • Investment options. You can invest your HSA funds to potentially grow your money even more -- a benefit you can’t explore with an FSA. 

The bottom line

An FSA is a flexible spending account offered through employers to help employees save for healthcare costs. You contribute pre-tax to an FSA, and depending on your employer, may be able to roll a portion of unused funds over for the next year. pay for eligible medical expenses. FSAs can be a valuable benefit for budgeting the cost of medical expenses, but it’s important to understand the specific rules of your FSA and to plan accordingly to ensure that you use all of the funds in your account before the end of the plan year.


At the beginning of the plan year, you decide how much you want to add to your FSA, up to $3,050 for 2023. Then, your employer will break this amount into regular installment that will be pulled from your paycheck, pre-tax, during the year. Your employer might also contribute to your flexible spending account.

For 2023, employees can contribute up to $3,050 to their healthcare FSA before taxes, through payroll deductions. If you’re married, your spouse can also contribute up to $3,050 to their own FSA through their employer. This is an increase from $2,850 in 2022.

In general, you have to spend the money in your FSA account, or you lose it at the end of the year. However, some employers offer a grace period that allows employees to spend FSA funds for a limited time after the end of the plan year. Some employers also let you carry over a portion of your funds into the following year. For 2023, you can roll over up to $610 in your FSA, if your employer offers this option.

Lizzie Nealon is a contributor for CNET and Bankrate. Lizzie earned her bachelor's degree in political science from Clemson University. At Clemson, she co-founded a campus publication called the Sensible Tiger that made news and politics digestible to college students. This experience instilled her passion for helping audiences navigate complex personal finance topics. She enjoys partially completing New Yorker crosswords, finding the best local restaurants and reading biographies in her free time.