If you have a health plan through a job, you can use a Flexible Spending Account (FSA) to pay for copayments, deductibles, some drugs, and some other health care costs. Using an FSA can reduce your taxes.

What is an FSA?

A Flexible Spending Account (also known as a flexible spending arrangement) is a special account you put money into that you use to pay for certain out-of-pocket health care costs.

You don’t pay taxes on this money. This means you’ll save an amount equal to the taxes you would have paid on the money you set aside.

Employers may make contributions to your FSA, but aren’t required to.

Learn about Flexible Spending Accounts

• For details about your company’s FSA, including how to sign up, ask your employer.

• Get complete information on Flexible Spending Accounts from the IRS.

You use your FSA by submitting a claim to the FSA (through your employer) with proof of the medical expense and a statement that it has not been covered by your plan. You will then receive reimbursement for your costs. Ask your employer about how to use your specific FSA.

Read more about how FSAs work in this IRS publication (PDF).

A few fast facts about FSAs

• FSAs are limited to $2,650 per year per employer. If you’re married, your spouse can put up to $2,650 in an FSA with their employer too.
• You can use funds in your FSA to pay for certain medical and dental expenses for you, your spouse if you’re married, and your dependents.
  • You can spend FSA funds to pay deductibles and copayments, but not for insurance premiums.
  • You can spend FSA funds on prescription medications, as well as over-the-counter medicines with a doctor's prescription. Reimbursements for insulin are allowed without a prescription.
  • FSAs may also be used to cover costs of medical equipment like crutches, supplies like bandages, and diagnostic devices like blood sugar test kits.
  • See a list of generally permitted medical and dental expenses.

FSA limits, grace periods, and carry-overs

You generally must use the money in an FSA within the plan year. But your employer may offer one of 2 options:

• It can provide a "grace period" of up to 2 ½ extra months to use the money in your FSA.
• It can allow you to carry over up to $500 per year to use in the following year.

Your employer can offer either one of these options but not both. It’s not required to offer either one.

At the end of the year or grace period, you lose any money left over in your FSA. So it's important to plan carefully and not put more money in your FSA than you think you'll spend within a year on things like copayments, coinsurance, drugs, and other allowed health care costs.

More answers: Flexible Spending Accounts