A healthcare flexible spending account (FSA) is an employer-sponsored benefit that lets you set aside pre-tax money from your paycheck to pay for medical, dental, and vision expenses. For 2025, you can contribute up to $3,300 per year. Because the money comes out before taxes are calculated, you effectively get a discount on every dollar you spend on qualifying healthcare costs.
How the Tax Savings Work
Each pay period, your elected FSA contribution is deducted from your gross pay before federal income tax, state income tax, and Social Security taxes are calculated. This means your taxable income drops by the amount you contribute, and you pay less in taxes overall.
The savings add up quickly. Consider two people who both earn $55,000 and spend $2,550 on out-of-pocket healthcare in a year. The one without an FSA pays taxes on the full $55,000, then pays medical bills from what’s left. The one with an FSA contributes $2,550 pre-tax, dropping their taxable income to $52,450. At a combined 30% tax rate, that FSA user saves $765 in a single year. The higher your tax bracket, the more you save per dollar contributed.
What You Can Spend FSA Money On
FSA funds cover a broad range of medical, dental, and vision costs. The IRS defines eligible expenses as costs related to the diagnosis, cure, treatment, or prevention of disease, along with equipment and supplies needed for those purposes.
Common eligible expenses include:
- Medical: Doctor visit copays, prescription medications, insulin, acupuncture, chiropractic care, ambulance services, blood sugar test kits, crutches, breast pumps and lactation supplies, and prescribed birth control
- Dental: Teeth cleanings, X-rays, fillings, braces, extractions, dentures, sealants, and fluoride treatments
- Vision: Eye exams, prescription eyeglasses, contact lenses, saline solution and lens cleaners, and laser eye surgery
One important limitation: over-the-counter medications generally need a prescription to qualify. You can’t use FSA funds on a drug that wasn’t prescribed by a doctor, with insulin being the sole exception. However, items like bandages, diagnostic devices, and medical equipment don’t need a prescription.
The Use-It-or-Lose-It Rule
FSA funds don’t last forever. Unlike a regular savings account, money left in your FSA at the end of the plan year can be forfeited. This is the biggest drawback of an FSA and the main reason careful planning matters when you choose your contribution amount.
Most employers offer one of two safety nets, but not both. A grace period gives you an extra two and a half months after the plan year ends to spend remaining funds on new eligible expenses. Alternatively, some plans allow a carryover of up to $660 into the next plan year (the 2025 limit). Your employer chooses which option to offer, or may offer neither, so check your plan details before assuming leftover money is protected.
Enrollment and Mid-Year Changes
You typically enroll in an FSA during your employer’s annual open enrollment period, and your election is locked in for the entire plan year. You can’t increase or decrease your contribution just because you changed your mind in March.
The exception is a qualifying life event. The IRS allows you to adjust your FSA election if you experience a significant change in circumstances, including marriage, divorce, or legal separation; the birth or adoption of a child; a change in employment status that affects health insurance eligibility; the death of a spouse or dependent; or a gain or loss of a tax dependent. Any change you request must be consistent with the event itself. You can’t use a marriage as a reason to max out your FSA if the change doesn’t logically connect to your new coverage situation.
Timing matters too. After September 30 of the benefit period, only changes that decrease your annual election will be accepted. Increases and new enrollments are blocked because there aren’t enough remaining pay periods to collect the contributions.
What Happens If You Leave Your Job
Your FSA is tied to your employer, not to you. If you quit or lose your job, any unspent FSA balance goes back to your employer. You do get a window of 60 to 90 days after your last day to submit reimbursement claims for expenses you incurred while still employed, so hold onto your receipts.
There is one option for keeping access to your FSA after leaving: COBRA continuation coverage. If you’re eligible, you can extend your FSA by continuing to make contributions. The catch is significant. Those contributions come from after-tax dollars (eliminating the core tax benefit), and you’ll pay a 2% administrative fee on top. COBRA for an FSA really only makes sense if you have a meaningful balance left and enough upcoming medical expenses to justify the cost.
How an FSA Differs From an HSA
Health savings accounts (HSAs) and FSAs both offer pre-tax healthcare spending, but they work differently in important ways. An FSA is owned by your employer. When you leave the company, the money stays behind. An HSA is owned by you permanently, even if you switch jobs or retire.
HSAs also allow you to invest your balance once it reaches $1,000 or more, letting the money grow over time. FSAs offer no investment options. On the flip side, HSAs require you to be enrolled in a high-deductible health plan, while FSAs are available with any type of employer-sponsored health insurance. If your employer offers a traditional PPO or HMO and you have predictable annual medical costs, an FSA is often the more accessible option.
How to Estimate the Right Contribution
The best approach is to look backward before committing forward. Pull up last year’s medical, dental, and vision receipts and add up your out-of-pocket spending: copays, prescriptions, glasses, dental work. If you know about upcoming expenses like braces, a planned surgery, or new prescription needs, factor those in too.
It’s better to underestimate slightly than to overestimate. Forfeiting unused money is a real cost, and even a generous carryover limit of $660 won’t protect a large surplus. If you’re unsure, start conservative in your first year. You can always increase your election during the next open enrollment once you have a better sense of your spending patterns.