What Is a Flexible Spending Credit Card?

A flexible spending account (FSA) is an employer-sponsored benefit allowing individuals to set aside pre-tax money for out-of-pocket healthcare or dependent care expenses. Though sometimes called a “flexible spending credit card,” the tool is actually a debit card that simplifies paying for eligible costs, acting as a direct conduit to the pre-funded account to help manage healthcare budgets and achieve tax savings.

Understanding the Flexible Spending Card

The flexible spending card functions like a standard debit card, drawing funds directly from the FSA. It is not a credit card; it does not involve borrowing money or impact credit scores. Funds are loaded into the FSA via payroll deductions from gross pay before taxes. This pre-tax contribution reduces taxable income, leading to tax savings.

The card can only be used up to the available balance in the FSA. For healthcare FSAs, the full elected annual contribution is generally available on the first day of the plan year, even if not all deductions are made. Primary FSA types are Health Flexible Spending Accounts (Health FSA) and Dependent Care Flexible Spending Accounts (Dependent Care FSA). Card usage aligns with the specific FSA type, ensuring funds are used for their intended purpose.

Health FSAs cover eligible medical, dental, and vision expenses for the account holder, spouse, and dependents. A Dependent Care FSA is for eligible dependent care services, like daycare or preschool, while the account holder and spouse work or seek employment. Some employers offer a Limited-Purpose FSA, covering only dental and vision expenses, often paired with a Health Savings Account (HSA).

What Can Be Purchased with the Card

The flexible spending card covers a wide range of eligible expenses per IRS guidelines, including prescription medications, doctor and specialist copayments, and health insurance deductibles for a Health FSA. Vision care (e.g., eye exams, eyeglasses, contact lenses) and dental work (e.g., cleanings, fillings, orthodontia) are also covered. Many over-the-counter medications and health products (e.g., bandages, first-aid supplies) became eligible without a prescription after legislative changes.

For a Dependent Care FSA, eligible expenses are for the care of a qualifying child under 13 or an incapacitated dependent. This includes daycare, preschool, before/after-school programs, and summer day camps. The care must be for the dependent’s well-being, allowing the account holder (and spouse, if married) to be gainfully employed or seeking employment.

Certain items are ineligible for FSA reimbursement. These include cosmetic procedures, health club memberships, or expenses reimbursed by other health plans. General health and wellness expenses not treating a specific medical condition are not covered. Understanding these distinctions ensures IRS compliance.

Using the Card for Purchases

Using the flexible spending card is like using any other debit or credit card at point of sale. Individuals can swipe, insert, or tap the card at eligible merchants. It can also be used for online payments for health products and services. While some terminals may prompt for “debit” or “credit,” selecting “credit” is often recommended since a PIN is not required. The card directly pays for eligible expenses, eliminating out-of-pocket payments and reimbursement.

Substantiation verifies FSA card purchases are IRS-eligible. At pharmacies or providers, the system may automatically identify eligible purchases via an Inventory Information Approval System (IIAS). However, for other purchases or if the merchant does not use IIAS, the FSA administrator may require receipts. Receipts must clearly show date of service, item, amount, and provider’s name.

Requested receipts must be submitted to the FSA administrator, often via an online portal or mobile app, within a specified timeframe (30-90 days). Failure to provide documentation can deem purchases ineligible. The individual may need to repay the ineligible amount to the FSA. Unpaid amounts may become taxable income and incur penalties.

Managing and Maintaining the Card

Flexible spending cards need activation before first use. Activation instructions are provided (phone or online). Safeguard the card; it provides direct access to pre-tax funds. Report lost or stolen cards immediately to the FSA administrator for unauthorized use prevention and replacement.

Regularly checking the FSA balance aids financial planning. Most FSA administrators provide online portals or mobile apps to monitor activity and balance. This helps track expenditures and ensures funds are utilized before year-end.

FSAs have a “use-it-or-lose-it” rule, requiring funds be spent by year-end or forfeited. However, employers may offer two exceptions. A grace period, extending the deadline up to two and a half months into the next plan year, allows additional time for expenses. Alternatively, some plans permit a limited amount of unused funds (e.g., up to $640 for 2024) to carry over. These options provide flexibility, but proactive FSA fund management maximizes benefits.