What Is a Flexible Spending Account?

FT Contributor
A man checks his account on a computer.

Bandages and contact solution are inexpensive medical items you may add to your shopping cart without thinking twice. However, over time these small items add up fast. Ongoing medical expenses and treatments that aren’t covered under regular health insurance can also negatively affect your budget. Even if you’re expecting these expenses, they can still make it hard to save money for other financial goals.

Your employer may offer a flexible spending account (FSA) in addition to health insurance and other employee benefits. If your financial health is important to you, an FSA may be able to help you stay on track and ensure you don’t fall victim to medical debt. An FSA is a savings account you contribute to tax-free. The money in the account can be used to pay for a variety of eligible medical and dental expenses.

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How Does an FSA work?

If you decide to participate in an FSA, your employer sets up the account for you. Depending on your medical situation and how much money you feel you’ll spend on medical expenses for the year, you can set a portion of your paycheck to contribute to the account. This amount is deducted from your paycheck without taxes being taken out. However, there are limits to how much you can contribute to your FSA. According to the IRS, the 2020 FSA contribution limit is $2,750 per year.

When you sign up for an FSA with your employer, you may access your funds through a card that works similar to a debit card. You present this card at your local pharmacy or store when making eligible purchases, just as you would normally pay for items at a store.

If you don’t receive a card, you may be asked to turn in your medical expense receipts for reimbursement from the account. In this case, you would complete eligible purchases using your own money, then turn in your receipts for reimbursement from your FSA.

FSA Rules

The money you contribute to your FSA can’t be used for every medical expense. Specific eligible expenses you can use FSA funds for may vary depending on your plan, but generally include:

  • Insurance copayments, coinsurance, and deductibles.
  • Prescriptions.
  • Dental and vision exams.
  • Blood sugar testing supplies.
  • Birth control.
  • Breast pumps.
  • Pregnancy tests.
  • Insulin.
  • Bandages.
  • Crutches.
  • Acupuncture.
  • Chiropractor appointments.
  • Psychological treatments.
  • Smoking cessation programs.

Your FSA funds cannot be used to pay for gym memberships, vitamins, cosmetic procedures, or over-the-counter drugs. It’s important to thoroughly review your eligible FSA expenses so you understand what you can use your funds for and which expenses you must pay for out of pocket.

How Much Should I Put Into My FSA?

Your personal medical expenses and insurance plan will help you determine how much you should contribute to your FSA. You should analyze your health insurance coverage, including copayments, coinsurance, and deductibles you’re responsible for paying when you seek treatment. This can help you calculate how much money you think you may need to pay throughout the year for medical treatments that are covered by your health insurance.

Additionally, it’s important to factor in your past medical expenses and the expenses you may incur in the future when determining how much to contribute to your FSA account. Analyze your past medical needs and consider the treatments or expenses you think you may encounter in the coming year. Add up any outstanding medical bills you have to pay in the upcoming year to figure out your medical expenses and how much you should consider contributing to your FSA.

FSA Advantages and Disadvantages

If your employer offers an FSA alongside other employee benefits, you should consider both the advantages and disadvantages before you sign up for an account.


Some of the most useful advantages attributed to an FSA account include the following:

  • The funds aren’t taxed: The contributions you make to your FSA account are not taxed, allowing your salary to stretch farther.
  • You can pay for your dependents’ and spouse’s expenses: You can use your FSA funds to pay for eligible medical expenses for your spouse and dependents.
  • Most medical supplies are covered: The list of eligible medical expenses is extensive, so you can use your FSA funds to pay for many medical or dental-related necessities.
  • Your FSA helps with copayments and deductibles: Even with an extensive health insurance plan, you may be responsible for copayments and deductibles, which can be paid for with your FSA funds.
  • Your take-home salary increases: Since your FSA dollars aren’t taxed and you’ll incur these medical expenses anyway, the money you take home in your paycheck increases when you sign up for an FSA.
  • Your funds are available immediately: When you contribute money to your FSA, you can immediately use it for eligible medical expenses without a waiting period.


An FSA also has some disadvantages, which include the following:

  • FSA funds can’t be used for premiums: Health insurance premiums can’t be paid for with the funds you contribute to your account, unless your employer offers a health savings account (HSA) instead of an FSA.
  • Over-the-counter drugs aren’t covered: You also can’t use your FSA funds to pay for drugs offered in stores, such as pain relievers or antihistamines.
  • There are maximum contribution limits: You can only contribute a specific amount each year, which may not be enough if you have high recurring medical expenses.
  • Your FSA funds have an expiration date: Generally, you have until the end of the year to use the funds you’ve contributed or they expire and can no longer be used.
  • You lose your account if you lose your job: Your FSA funds are nonrefundable if you’re no longer employed.
  • There’s a limited enrollment period: You have to decide if you want to sign up for an FSA within your enrollment period or you lose your chance.
  • You aren’t eligible for tax write-offs: Since the money you contribute to your FSA account isn’t taxed, you can’t claim your eligible expenses as tax write-offs.

If your employer offers an FSA, it’s important to review whether this account is beneficial to you. By analyzing the pros and cons of an FSA and your personal situation, you can decide whether to take advantage of this employer-sponsored benefit.

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