FSA Benefits Explained: What a Flexible Spending Account Is and How to Use It

November 6, 2026 Invest Clarity Path Team

A flexible spending account can save you money on health costs, but the rules have a catch that surprises many people. This guide explains what a health FSA is, how the money goes in before tax, and what happens to money you do not use.

You will also see a worked example with round numbers, a short comparison with a health savings account, and the mistakes to avoid. Everything here is general education, and it is not advice for your own benefits or taxes.

The short answer

A health flexible spending account, or FSA, is a work benefit that lets you set aside pay before tax to cover health costs such as doctor visits, prescriptions, glasses, and dental care. It can lower your tax bill, but most of the money must be used within the year. For tax year 2027, the IRS limit is $3,500 per employee.

What is a health FSA?

A health flexible spending account, usually called a health FSA, is an account your employer sets up for you. You put part of your pay into it, and you use the money to pay for health costs. The money goes in before income tax is taken, which is what makes it valuable.

You can use an FSA only if your employer offers one. Some employers offer a limited purpose FSA instead, which covers only dental and vision costs. If your job does not offer an FSA, you cannot open one on your own.

When you sign up, you choose an amount to put in for the year, up to the IRS limit. The amount is taken from your pay in small parts, and the full yearly amount is often ready to use early in the year.

How money goes in before tax

The main benefit of an FSA is that the money goes in before tax. Your employer takes the amount out of your pay before income tax and payroll tax are worked out. That means your taxable pay is lower, and less tax is taken.

Say you put $2,400 into an FSA in a year, and your example tax rate is 20 percent. The tax saving is $480, which is $2,400 times 20 percent. You do not get a refund for that amount. You simply pay $480 less tax across the year.

The saving is real, but it has a limit. You only save tax on money that you actually use for health costs that count. Money you put in and never use is lost.

What can an FSA pay for?

A health FSA pays for medical costs that the IRS allows. The costs below are the common ones.

Doctor visits, including copays, the fixed amount you pay at a visit.
Prescription medicines and insulin.
Dental care, such as fillings, cleanings, and braces.
Vision care, such as eye tests, glasses, and contact lenses.
Hospital and lab costs, and many medical tests.
Some over the counter items, such as pain relief and first aid supplies.
Health plan costs you pay yourself, such as deductibles.

Some costs do not count. Cosmetic surgery, toothpaste, and gym fees do not count. Health insurance premiums usually do not count either. Check the IRS list of medical costs before you spend.

Most FSA plans give you a debit card to pay at the doctor, the pharmacy, or the dentist. Sometimes you pay first and send in the receipt for a refund. Keep your receipts.

The use it or lose it rule

The most important rule of an FSA is the use it or lose it rule. Money you do not use by the end of the plan year is usually lost. It does not roll over into the next year like money in a savings account.

Many plans soften the rule in one of two ways. Some offer a grace period of up to two and a half months after the plan year ends. Others offer a carryover, which lets you carry a limited amount into the next year.

For tax year 2027, the IRS says the most a plan can let you carry over is $700, which is $20 more than the $680 allowed for tax year 2026. Your plan may allow less, or it may offer a grace period instead. Check your plan papers to see which one your plan uses and how much it allows.

This rule is why a careful estimate matters. Put in a little less than you are sure to spend, rather than a large amount you may lose.

How much can you put in?

The IRS sets a yearly limit on how much an employee can put into a health FSA. For tax year 2027, the limit is $3,500 per employee, which is $100 more than the $3,400 limit for tax year 2026. The limit is per person, not per family.

Your employer can set a lower limit than the IRS limit, but not a higher one. The limit also covers your own money only. Money your employer puts in for you does not count toward the IRS limit.

Choose the amount when you sign up, usually during open enrollment, or when you start a new job. You cannot change it during the year unless a big life event happens, such as marriage or the birth of a child.

Worked example: what an FSA can save

Example only. This example uses a made up example tax rate of 20 percent, and it ignores other details such as state tax rules. Real tax rates depend on your income and your state.

Meet Dana. Dana earns $50,000 a year and puts $2,400 into her FSA, which is $200 a month.

Step 1: work out the pay that tax is worked out on. $50,000 minus $2,400 equals $47,600.

Step 2: work out the tax saving. $2,400 times 20 percent equals $480. Dana pays $480 less tax across the year.

Step 3: pay a dental bill. Dana pays a $300 dental bill with FSA money, which was never taxed. Without the FSA, she would need $375 of pay to have $300 left after a 20 percent tax, because $375 times 80 percent equals $300.

So the FSA saved Dana $480 in tax, and the $300 dental bill cost her only $300 of FSA money, not $375 of pay. The saving is larger when the tax rate is higher.

The warning is part of the example too. If Dana had put in $2,400 but spent only $1,900 on health costs, the $500 left over would be lost under the use it or lose it rule.

FSA versus HSA in brief

An FSA and a health savings account, or HSA, are easy to mix up. Both hold money before tax for health costs, but they work in different ways. An HSA goes with a high deductible health plan, and the money in it is yours to keep. It rolls over year after year.

An FSA is set up by your employer, and the money usually does not roll over. It must be used in the plan year, apart from a grace period or a small carryover. You cannot put money into an FSA on your own.

If your job offers both, read the plan papers to see which one you can use. Our guide HSA vs FSA explains the differences in more detail.

Mistakes to avoid

Putting in more than you are likely to spend, and losing the rest at the end of the year.
Forgetting the deadline, and leaving money in the account when the year ends.
Paying for a cost that does not count, and then finding that the plan will not pay it back.
Not signing up during open enrollment, and then waiting a full year for the next chance.
Assuming the money rolls over like savings. It does not, apart from a grace period or a small carryover.

The fix is simple. Before open enrollment, add up last year’s health costs and the ones you know are coming, and put in that amount.

Quick answers

What is a health FSA?

A health flexible spending account is an account your employer sets up so you can set aside pay before tax for health costs such as doctor visits, prescriptions, glasses, and dental care.

What is the FSA limit for tax year 2027?

For tax year 2027, the IRS limit for a health FSA is $3,500 per employee. For tax year 2026, the limit was $3,400.

What happens to FSA money I do not use?

Unused FSA money is usually lost at the end of the plan year. Some plans offer a grace period of up to two and a half months, and others let you carry over up to $700 for tax year 2027.

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