Your Job Offers Free Tax Savings on Medical Bills. Here's How
Bottom line
An FSA can save you $400+ a year in taxes on money you were already going to spend.
In this guide
What it is
An FSA (Flexible Spending Account) is a special account your employer offers where you put in money before taxes are taken out, then use that money to pay for medical expenses.
By the numbers
If you earn $55,000 and contribute $1,500 to an FSA, you don't pay income tax on that $1,500. At a 22% federal tax rate, that's $330 back in your pocket on money you were spending on healthcare anyway.
How it works
You choose an annual contribution amount during open enrollment (the period each fall when you pick your workplace benefits). That amount gets divided across your paychecks, deposited pre tax into your FSA, and you spend it using a dedicated debit card on qualifying expenses like doctor copays, prescriptions, glasses, dental work, and hundreds of over the counter items including contact lens solution, pain relievers, and first aid supplies.
The catch
FSA money expires. Most accounts follow a 'use it or lose it' rule. whatever balance remains at year end disappears. Some employers offer a grace period or let you roll over up to $640, but never assume yours does. Contributing $2,000 and spending only $800 means you forfeit $1,200.
FAQ
What happens to unused FSA funds at year end?
FSA funds that are not used by the plan year end (or grace period end) are forfeited. Employers may offer a grace period of up to 2.5 months after the plan year ends, or allow you to roll over up to $660 (2025 limit). Check your plan documents to know your specific deadline and rollover limit. This is the main reason not to contribute more than you will use.
What can I buy with my FSA?
FSA funds cover a wide range of qualified medical expenses: deductibles, copays, prescriptions, dental and vision care, glasses, contact lenses, and many over-the-counter items (bandages, antacids, pain relievers, menstrual products). The CARES Act of 2020 made OTC medicines eligible without a prescription. A full IRS list is in Publication 502.
Can I change my FSA contribution during the year?
Generally no. Your FSA election is locked for the plan year unless you experience a qualifying life event (marriage, divorce, birth of a child, change in employment status). This is another reason to estimate conservatively when enrolling. The only exception is if your employer offers a change option during the year change option under a special rule, which became temporarily available during COVID but is rare permanently.
What to check next
Add up what you spent on medical, dental, and vision last year, then enroll in your FSA for that amount during open enrollment this fall.
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