Flexible Spending Accounts (FSAs) allow employees to set aside pre-tax dollars for qualified medical and dependent care expenses. Contributions are deducted from paychecks before taxes, reducing taxable income. Unused funds typically expire at year-end unless a plan offers a grace period or carryover option.
Medical FSAs cover out-of-pocket healthcare costs not paid by insurance. These include doctor visits, prescription medications, dental procedures, vision care, and certain over-the-counter items with a doctor's note. Dependent Care FSAs help pay for childcare or eldercare so parents or caregivers can work. Both types require documentation to verify eligibility.
The IRS defines eligible expenses in Publication 502 and Publication 969. Employers may offer additional coverage based on plan design. Not all healthcare costs qualify-items like vitamins, cosmetic surgery, or gym memberships do not. Only expenses that meet IRS criteria can be reimbursed using FSA funds.
Employees elect a contribution amount each year during open enrollment. The chosen amount is withheld from paychecks throughout the year. Funds are available for use as soon as they're deposited into the account, though some plans delay access until the first paycheck cycle.
To claim reimbursement, submit a claim form with receipts or invoices showing the date, provider, service, and cost. Some employers use FSA debit cards linked to the account. Purchases made with the card are automatically deducted from the balance if the item is eligible.
For example, a $120 dental cleaning covered by insurance requires a $30 co-pay. The employee uses FSA funds to pay the co-pay. The dentist submits the claim to the insurance company and the FSA administrator separately. The FSA pays the $30 directly, reducing the employee's out-of-pocket cost.
There are two primary FSA types: Medical FSA and Dependent Care FSA. They serve different purposes and have distinct rules.
| Type | Eligible Expenses | Annual Limit (2024) | Carryover Option |
|---|---|---|---|
| Medical FSA | Prescriptions, copays, dental care, vision services, hearing aids, insulin, birth control, over-the-counter drugs with prescription | $3,200 | Yes (up to $610 carryover under IRS rules) |
| Dependent Care FSA | Childcare for children under 13, eldercare for dependents unable to care for themselves, summer camps for disabled dependents | $5,000 ($10,000 if married filing jointly) | No |
Medical FSAs focus on health-related costs. Common uses include insulin, hearing aids, contact lenses, and prescription eyeglasses. Over-the-counter items like pain relievers or allergy medicine require a doctor's note to qualify. Without a note, the expense is ineligible.
Dependent Care FSAs support working parents and caregivers. Expenses must be for care while the employee works or looks for work. A child's preschool tuition qualifies, but private school fees beyond basic education do not. Daycare centers, babysitters, and after-school programs are eligible if the caregiver is under 13 or disabled.
Employers may offer both types. Employees can contribute to both accounts simultaneously, but the limits apply independently. A worker earning $75,000 annually can contribute $3,200 to a Medical FSA and $5,000 to a Dependent Care FSA, totaling $8,200 in pre-tax spending.
Many assume FSA funds can cover wellness products like fitness trackers or gym memberships. This is incorrect. The IRS explicitly excludes these items. Even if a product is marketed as "health-related," it doesn't qualify unless it treats a diagnosed medical condition.
Another misconception is that FSA funds can be used for travel to see a specialist. While the appointment itself is eligible, transportation costs like gas, parking, or flights are not. Only the medical service fee counts toward reimbursement.
A less obvious rule: FSA funds cannot be used for elective procedures. Cosmetic surgeries such as rhinoplasty or liposuction are not eligible. However, reconstructive surgery after injury or illness is covered. For example, a patient recovering from a car accident can use FSA funds for breast reconstruction surgery, but not for a routine nose job.
I once reviewed a claim for a $280 massage therapy session billed as "physical therapy." The provider did not hold a valid license, and the treatment was not prescribed by a physician. The claim was denied. Documentation must match the service and be issued by a licensed professional.
Consider Maria, a teacher who earns $58,000 annually. Her employer offers a Medical FSA with a $3,200 annual limit. She needs new prescription glasses due to worsening nearsightedness.
She visits an optometrist for a full eye exam ($150), receives a prescription, and buys frames and lenses ($320). The optometrist provides a receipt listing the services and costs. Maria submits the claim online with the receipt attached.
The FSA administrator processes the claim. Since the exam and glasses are eligible, the $470 total is reimbursed from her FSA balance. She had $2,800 remaining in her account after prior claims. After this reimbursement, $2,330 remains available for the rest of the year.
If Maria had used her FSA debit card at the optical store, the transaction would have been processed instantly. The system checks eligibility in real time. If the purchase is not approved, the transaction is declined.
FSA funds differ from Health Savings Accounts (HSAs). HSAs are portable, roll over indefinitely, and can be invested. FSAs are tied to employment and usually forfeit unused funds at year-end. Only employees with high-deductible health plans can open HSAs; FSA eligibility depends on employer plan offerings.
Also, FSA funds cannot be used for health insurance premiums. Premiums are not eligible expenses, even if they are paid through payroll deductions. The only exception is long-term care insurance premiums, which are eligible under specific conditions.
Some employers offer a limited-purpose FSA that covers only vision and dental expenses. This allows employees to maintain a general-purpose FSA for medical care while using a separate account for dental and vision. This prevents overspending in one category.
Always confirm eligibility with your plan administrator. What's allowed in one workplace may not be in another. For example, some plans allow FSA funds for acupuncture treatments, others do not. Check the Summary Plan Description (SPD) or ask HR directly.
Understanding what can be used with FSA funds reduces financial stress and maximizes tax savings. Review your plan's list of eligible expenses regularly. Keep receipts for at least three years in case of IRS audits.
Always consult IRS Publication 502 and your employer's FSA plan documents. Only eligible expenses qualify. Misuse leads to repayment and potential penalties. Stay informed, stay compliant, and use FSA funds wisely.