Do You Get Your FSA Money Up Front?

A Flexible Spending Account (FSA) is an employer-sponsored benefit designed to help employees manage out-of-pocket healthcare expenses with tax advantages. It allows individuals to set aside pre-tax money from their paycheck for eligible costs, effectively reducing their taxable income. FSAs are not government programs.

Accessing Your FSA Funds

The full annual election amount chosen by an employee for an FSA is typically available on the first day of the plan year. This means that even if only a small portion has been contributed through payroll deductions, the entire elected sum can generally be used for eligible expenses from the start. This immediate availability provides financial flexibility for unexpected medical costs early in the year.

A defining characteristic of FSAs is the “use it or lose it” rule, meaning funds not utilized by the end of the plan year are generally forfeited to the employer. To mitigate this, employers may offer options such as a grace period or a carryover feature. A grace period provides an extension of up to two and a half months into the next plan year for employees to incur new expenses and use remaining funds. For instance, if a plan year ends on December 31, a grace period might extend the spending deadline until March 15 of the following year.

Alternatively, some plans allow a limited amount of unused funds to be carried over into the subsequent plan year. For 2024, the maximum amount that can be carried over is $640, increasing to $660 for 2025. Employers have the discretion to offer either a grace period or a carryover, but not both.

Funding Your FSA

FSA funds are primarily contributed through pre-tax payroll deductions, which reduces an employee’s taxable income for federal income tax, and in most cases, state income tax, as well as FICA (Social Security and Medicare) taxes. Employees elect their annual contribution amount during open enrollment periods, and this total is then divided into equal installments deducted from each paycheck throughout the plan year.

The Internal Revenue Service (IRS) sets annual maximum contribution limits for FSAs. For 2024, the health FSA contribution limit is $3,200 per employee, and this limit will increase to $3,300 for 2025. Once an election is made, it is generally irrevocable for the plan year. However, changes to the elected amount may be permitted in the event of a qualifying life event, such as marriage, divorce, the birth or adoption of a child, or a change in employment status affecting eligibility for coverage.

Eligible Expenses and Reimbursement

FSA funds can be used for a wide array of eligible medical expenses. Common examples include medical co-pays, deductibles, prescription drugs, dental care, and vision care. Certain over-the-counter medications and medical equipment, such as crutches or blood pressure monitors, are also typically eligible.

The reimbursement process involves an employee first paying for an eligible expense out-of-pocket. Subsequently, a claim is submitted to the FSA administrator, requiring documentation such as itemized receipts, Explanation of Benefits (EOBs) from an insurance provider, or a doctor’s note for specific items. Upon approval, funds are reimbursed to the employee.

Many FSAs also provide a dedicated debit card for direct payment at the point of sale for eligible expenses. These debit card transactions still require substantiation to confirm the expense’s eligibility. Employees should always retain itemized receipts, as the FSA administrator may request them to verify that the purchase aligns with IRS guidelines for eligible expenses. Failure to provide proper substantiation can lead to the deactivation of the FSA debit card.