What Is an FSA?

FSAs, or flexible spending accounts, are offered by employers and can help you save money on health care expenses. Here’s what you need to know.

Written by Kat Tretina / March 22, 2022

Quick Bites

  • 43% of private industry workers and 71% of state and local government workers had access to a flexible spending account (FSA) in 2021.
  • You won’t owe income taxes on the money you contribute to an FSA.
  • You can use your FSA to pay for your out-of-pocket medical costs.
  • The annual contribution cap is $2,850 for 2022. But it’s not always a good idea to contribute the maximum.

Even when you have health insurance, you know all too well how out-of-pocket medical costs can really add up. U.S. households spent an average of $5,177 on health care in 2020, a total that includes about $1,500 for medical supplies and services and other expenses aside from insurance premiums.[1]

A flexible spending account (FSA) can be a great way to save money on health care expenses. So if your employer offers an FSA as an optional employee benefit, you should think about signing up. With a health care FSA, you can use tax-free dollars to pay for eligible medical expenses, helping you keep more of your hard-earned paycheck. You won’t owe income taxes on the money you contribute to an FSA.[2]

However, it’s important to understand how the account works before you contribute your money. Read on to learn the advantages and limitations of an FSA, so you can decide how much of your paycheck to set aside.

Inside this article

  1. What is an FSA?
  2. What’s an eligible FSA expense?
  3. How do I use my FSA?
  4. How much should I contribute?
  5. What about marketplace plans?

What is an FSA?

Your employer may offer FSAs as part of your overall benefits package. An FSA allows you to set aside money from your paycheck on a pre-tax basis and spend it on eligible expenses. Forty-three percent of private industry workers and 71% of state and local government workers had access to an FSA in 2021.[3]

“The advantages of an FSA are that you can reduce your taxable salary and cover unexpected medical expenses without having to pay a large lump sum out of pocket,” says Annette Harris, a human resources professional and the founder of Harris Financial Coaching. “Your taxable salary is decreased because you are contributing pre-tax income to your FSA.”

When most people talk about FSAs, they’re usually referring to health care FSAs, but there are actually three kinds of FSAs:

Health care FSA

This version can be used to pay for approved health care expenses, including copays, dental and vision costs, and outlays for prescription drugs.

Dependent care FSA

You can use this type of FSA to pay for dependent care expenses for qualifying children or adults, such as fees for summer day camp, daycare or before- or after-school programs.

Limited expense health care account FSA (LEX HCFSA)

This FSA, generally used alongside a health savings account (HSA), covers eligible dental and vision expenses.[4]

What’s an eligible health care expense for an FSA?

A healthcare FSA can be a powerful cost-savings tool. You can use your FSA to pay for common out-of-pocket health care costs like your copayments or coinsurance for doctor or hospital visits, prescription medications, and medical tests like X-rays and lab work.

But an FSA can also be tapped for a wide range of health-related purchases, including prescription eyeglasses and contact lenses and dental treatments. And some FSA-eligible expenses may surprise you. These include:

Acne products

Previously, to use your FSA to pay for acne medications or creams, you needed a prescription. However, effective Jan. 1, 2020, a prescription is no longer required for FSA eligibility.

Sunscreen

If you buy sunscreen (SPF 15+ and “broad spectrum”) or sunburn creams, the cost is reimbursable.

CPAP

If you’ve been diagnosed with sleep apnea and your doctor has prescribed a CPAP machine, the cost is reimbursable.

Mileage and tolls

If you need to travel to a doctor’s office or clinic for treatment, you can reimburse yourself for the mileage, parking fees and tolls.

Masks

Masks, including surgical or cloth versions, are eligible for reimbursement.

Hand sanitizer

During the pandemic, hand sanitizer became more popular than ever. Luckily, under an FSA, hand sanitizer is a reimbursable expense.

Sunglasses

Sunglasses are reimbursable if they have prescription lenses.[5]

How do I use my FSA?

If you have an FSA, there are two main ways to spend the money in the account:

FSA debit

With this option, your employer’s benefits manager will send you a debit card that functions like a bank debit card, except that it’s good only for qualifying health care expenses. You can swipe it at the register or enter the number online when you make a purchase or visit a doctor’s office, and the amount due will be debited from your FSA.

Claim reimbursement

With this approach, you pay for an eligible health care product or service with your own credit card, debit card or cash. Then you submit a claim to your employer or the company managing your FSA, and, if it’s approved, you’ll be reimbursed with funds from your FSA.

Tip: Keep careful records of your FSA expenses. It’s important to hold on to receipts for any FSA-eligible purchases you make in case you need to appeal a claim or answer any questions about your transactions.

How much should I contribute to my FSA?

When you’re considering how much to contribute to an FSA during open enrollment or when you start a job, keep in mind that the cap in 2022 is $2,850. That’s per person, per employer. So if you’re married and your spouse’s employer offers an FSA too, you can contribute another $2,850 to their FSA.

However, contributing the maximum amount isn’t always a good idea. To come up with a contribution amount, consider the following factors:

Use-it-or-lose-it rules

With an FSA, you typically have to spend the money on eligible expenses within the plan year. If not, the money is gone. “You must use all of your FSA funds by the required deadline, or you forfeit those funds with no recourse for reimbursement,” says Harris. “It’s essential to estimate the funds you will need for the year to avoid losing your hard-earned income.”

Exceptions to the rules

Some employers offer grace periods or carry-overs. In that case, you could have an additional 2½ months to use your funds, or you may be able to carry over as much as $570 of your unused cash (for 2022) to use in the following year.

Your typical health care spending

Contributing the maximum makes sense if you have significant health care expenses coming up. Say you scheduled an appointment for Lasik eye surgery or plan to purchase a CPAP—both substantial expenses. Covering at least part of those costs with the pre-tax funds in an FSA will save you money. If you expect to have only a few sporadic costs during the year, such as the occasional prescription copay, you may want to put in a smaller amount.

Employer match

Some employers match FSA contributions or help fund the account, which is a pretty nice perk.[2]

Tip: If you are at risk of losing funds because you haven’t had enough qualifying expenses, Annette Harris, a human resources professional and the founder of Harris Financial Coaching, says to act fast. “If you are near the deadline and your funds are about to expire, purchase items that you use frequently,” she says. You can use your funds to stock up on things like aspirin, bandages, cold and flu medicine, topical itch creams, disinfectant wipes and hand sanitizer.

Can I contribute to an FSA if I have a marketplace plan?

Unfortunately, you can’t contribute to an FSA if you purchased an individual health insurance plan through the government health insurance marketplace. FSAs are only available to employees whose employers offer FSAs as a benefit. If you buy a high deductible health plan on the exchange, however, you may be able to fund a health savings account (HSA), which has similar tax benefits.

Article Sources
  1. “Consumer Expenditures Survey 2020,” U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/cesan.pdf.
  2. “Using a Flexible Spending Account,” Healthcare.gov, https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts.
  3. “Employee Benefits Survey,” U.S. Bureau of Labor Statistics, https://www.bls.gov/ncs/ebs/factsheet/flexible-benefits-in-the-workplace.htm.
  4. “Flexible Spending Accounts (FSAs),” National Institutes of Health, https://hr.nih.gov/benefits/insurance/flexible-spending-accounts.
  5. “Which Expenses Are Eligible for HSA, FSA and HRA Reimbursement?” Cigna, https://www.cigna.com/individuals-families/member-resources/hsa-fsa-hra-payments/eligible-expenses.

About the Author

Kat Tretina

Kat Tretina

Kat is dedicated to teaching people how to pay down debt, boost their incomes and reduce financial stress. Her work has been published by Reader's Digest, The Huffington Post, Forbes Advisor and more.

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