How to Use an FSA: A Step-by-Step Overview of Eligible Expenses

A Flexible Spending Account (FSA) helps manage healthcare costs by allowing pre-tax contributions for medical expenses. Many people miss out on its full benefits due to confusion about its rules. Understanding how to use an FSA effectively can maximize savings and prevent losing unused funds.

Contribution Amounts

The IRS sets annual FSA contribution limits, which adjust for inflation. In 2024, employees can contribute up to $3,200. If both spouses have FSAs, each can contribute the full amount, doubling the household’s tax-advantaged savings. Employers may also contribute, and these amounts do not count toward the employee’s limit.

Unlike a Health Savings Account (HSA), an FSA is employer-based, meaning funds do not transfer if you change jobs. Contributions are deducted from payroll, and the full elected amount is available at the start of the plan year, even before contributing the total sum. This allows employees to cover large medical expenses early in the year.

Eligible and Ineligible Expenses

Knowing which expenses qualify for FSA reimbursement helps avoid unexpected costs. The IRS defines eligible expenses under Section 213(d) of the Internal Revenue Code, covering medical, dental, vision, and some over-the-counter (OTC) items.

Eligible expenses include copayments, deductibles, prescription medications, eyeglasses, contact lenses, and dental treatments like fillings and root canals. Many OTC medications, such as pain relievers and allergy medicine, qualify but often require a doctor’s prescription. Preventive care, including vaccinations, annual physicals, and cancer screenings, is also covered. Medical equipment like blood pressure monitors, thermometers, orthopedic supports, and mobility aids such as crutches and wheelchairs are eligible. Some alternative treatments, like acupuncture, may qualify if deemed medically necessary.

However, not all healthcare-related purchases are reimbursable. Cosmetic procedures, including teeth whitening and elective plastic surgery, are generally excluded unless correcting a medical condition. Gym memberships and fitness programs do not qualify unless prescribed for a specific condition, with supporting documentation required. Vitamins and supplements are only eligible if prescribed for a diagnosed deficiency. Personal care items like toothpaste, deodorant, and non-medicated skincare products are also ineligible.

Reimbursement Procedures

To access FSA funds, employees must submit claims with proof of eligibility. Most plans allow submissions through an online portal, mobile app, or by mailing a reimbursement form with itemized receipts. These receipts must include the provider’s name, date of service, a description of the product or service, and the amount paid. Generic credit card statements or non-itemized invoices are insufficient.

Many FSAs offer debit cards linked to the account for direct payments at approved vendors. While this eliminates reimbursement requests, transactions may still require verification. If flagged, employees must submit documentation or risk denial. Some expenses, particularly those not universally recognized as medical necessities, may require a Letter of Medical Necessity (LMN) from a healthcare provider.

Deadlines and Grace Periods

FSAs operate on a “use-it-or-lose-it” basis, meaning funds must be spent within the plan year. Some employers offer either a grace period or a carryover option. A grace period extends the spending deadline by up to 2.5 months, while a carryover allows up to $640 of unused funds to roll over. Employers can offer one option, not both, depending on the plan.

The claim submission deadline is another key factor. Even if expenses were incurred before year-end, employees must file reimbursement requests by a set deadline, typically 60 to 90 days after the plan year ends. Missing this deadline results in forfeited funds. Some plans also impose deadlines for submitting supporting documentation if an FSA debit card transaction is flagged for review. Unresolved transactions may lead to card suspension or repayment requirements.

Documentation Tips

Proper documentation ensures FSA claims are approved and prevents delays. Itemized receipts should be kept for all purchases, as they provide necessary details such as the date of service, provider name, description of the product or service, and the amount paid. Without these details, claims may be denied.

Medical invoices, explanation of benefits (EOB) statements from insurance providers, and prescription drug receipts are also useful records. If an expense is not automatically recognized as eligible, a Letter of Medical Necessity (LMN) from a healthcare provider may be required. This letter should specify the medical condition being treated and explain why the item or service is necessary. Keeping these documents organized throughout the year prevents last-minute scrambling before claim submission deadlines.

Tax Implications

FSAs provide tax benefits by allowing employees to contribute pre-tax dollars, reducing taxable income. Contributions are deducted before federal income, Social Security, and Medicare taxes, leading to significant savings. For example, an individual in the 22% tax bracket contributing the 2024 maximum of $3,200 would save approximately $704 in federal income taxes alone, not including payroll tax savings.

However, FSA funds cannot be claimed as a deduction on a tax return, as the tax benefit is received upfront through payroll deductions. If an employee leaves their job mid-year and has spent more than they contributed, they are not required to repay the difference. On the other hand, any unused funds forfeited at year-end do not provide any tax benefit. Understanding these tax considerations helps employees make informed decisions about their contributions and spending.