What Is a Flexible Spending Account?

What is a flexible spending account? If you estimate your dental and medical expenses for a year, you can save the money from your paycheck.

A flexible spending account (FSA) helps you save money for out-of-pocket medical expenses. These accounts are useful for people who have a good idea how much they will spend on healthcare during a given year.

When you sign up for an FSA, the entire amount you save for the year is usually available on a debit card, up front, while you pay your employer back through tax-free payroll deductions. Your employer may contribute money as well, but it won’t count as income. Unlike with a health savings account, you can’t have an FSA if you’re self-employed.

FSA contributions can total $2,750. If you're married, your spouse can save another $2,750.

Your FSA can help you pay for copayments, deductibles, and coinsurance. You can also buy prescription and over-the-counter drugs, crutches, bandages, and other medical devices, like blood sugar test kits. You can’t, however, use your FSA to pay monthly insurance premiums; you also can’t use it to buy a TV. The Internal Revenue Service (IRS) determines qualified and unqualified expenses.

Some employers offer a special FSA so you can save money to pay for child or adult (dependent) care. But be careful. If you meant to save money in an FSA for healthcare expenses but accidentally put it in a dependent care FSA, you can’t make any transfers from one account to the other.

FSAs have other drawbacks.

If you don’t use the money in your FSA by year’s end, you lose it, the money going back to your employer. Your employer does, however, have the option to allow you to roll over $500 into your FSA for next year. Some let you; some don’t. Your employer may also give you a grace period of up to 2 and a half months to use your remaining FSA funds after the year changes.

Make sure you know – before signing up – how your employer’s FSA plan works. At the end of the year, if you realize your FSA isn’t empty, check the list of qualified expenses for items you can stock up on.

And keep your receipts. You’ll not only have a record of your healthcare expenses but also need to prove to the IRS they were qualified when you file your taxes.