A general purpose FSA is an employer-sponsored flexible spending account that lets you set aside pre-tax pay to cover out-of-pocket medical, dental, and vision costs your insurance doesn’t pick up. Your election comes out of your paycheck before federal income tax and FICA are calculated, so every dollar you route through the account is a dollar that isn’t taxed. For the 2026 plan year, you can contribute up to $3,400.
How the Pre-Tax Mechanism Works
A general purpose FSA sits inside what federal tax law calls a cafeteria plan, governed by Internal Revenue Code Section 125. You tell your employer how much to withhold for the year, and that amount is split across your paychecks and diverted into the account before taxes are figured. Because the money never counts as taxable wages, you don’t pay federal income tax on it.
The FICA piece is what sets an FSA apart from simply deducting medical expenses on your tax return. FSA contributions are also exempt from Social Security and Medicare taxes, saving you an additional 7.65% that you couldn’t recoup any other way.1FSAFEDS. Are Expenses Paid With an HCFSA Tax Deductible Whether your state also exempts the contribution from state income tax depends on where you live.
Contribution Limit for 2026
The IRS adjusts the FSA cap each year for inflation. For 2026, the maximum employee salary reduction contribution is $3,400, up from $3,300 in 2025.2FSAFEDS. New 2026 Maximum Limit Updates The base limit comes from Section 125(i) of the Internal Revenue Code, rounded to the nearest $50.3Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans
Some employers kick in matching funds or flex credits on top of what you contribute. Those employer dollars generally do not count against your $3,400 limit, unless the plan lets you take them as cash instead, in which case they are treated as your own salary reduction. Your plan documents will spell this out.
The Uniform Coverage Rule
The feature that separates a health FSA from an ordinary savings account is the uniform coverage rule. Your full annual election is available for reimbursement on the first day of the plan year, no matter how little you’ve actually contributed through payroll deductions so far.4Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
Elect $3,400 for the year and need $2,000 of dental work in January? You can pay the whole bill from the FSA even though only a fraction of your election has been withheld. Your employer fronts the rest. The flip side: if you leave the job mid-year having spent more than you contributed, you generally aren’t required to pay back the difference.
Which Expenses Qualify
Eligible expenses are defined by Internal Revenue Code Section 213(d), which covers amounts paid for the diagnosis, treatment, or prevention of disease and anything that affects a structure or function of the body.5Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses In practice, that means:
- Doctor and hospital costs: co-pays, deductibles, coinsurance, lab work, diagnostic tests, specialist visits
- Dental care: cleanings, fillings, braces, crowns, extractions
- Vision care: eye exams, prescription glasses, contact lenses, LASIK
- Prescription medications and insulin
- Mental health services, including therapy, psychiatric care, and substance abuse treatment
- Medical equipment such as crutches, blood pressure monitors, hearing aids, and wheelchairs
Since the CARES Act, over-the-counter medications like pain relievers, allergy pills, and cold medicine no longer require a prescription for FSA reimbursement, and menstrual care products are also eligible.6Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act Basic supplies like bandages, thermometers, and sunscreen rated SPF 15 or higher also qualify.
What Doesn’t Qualify
The IRS draws a line between treating medical conditions and maintaining general wellness. Cosmetic procedures like face lifts, hair transplants, and teeth whitening are ineligible unless they correct a deformity caused by a congenital abnormality, accidental injury, or disfiguring disease.7Internal Revenue Service. Publication 502 – Medical and Dental Expenses
Also excluded: gym memberships, vitamins and supplements taken for general health, weight-loss programs not tied to a specific diagnosed condition, and diet food. Controlled substances that remain illegal under federal law don’t qualify either, even if your state has legalized them.7Internal Revenue Service. Publication 502 – Medical and Dental Expenses The working test is whether a physician has diagnosed a specific medical condition that the expense treats. A general recommendation without an underlying diagnosis isn’t enough.
Enrolling and Changing Your Election
You sign up during your employer’s open enrollment period or when you first become eligible as a new hire, choosing a dollar amount for the plan year. Once the plan year begins, that election is locked. You cannot raise or lower it simply because your spending pattern shifted.
The exception is a qualifying life event: marriage, divorce, birth or adoption of a child, or a change in a spouse’s employment. Any of these can open a limited window to adjust your election. The window’s length varies by plan.8FSAFEDS. Qualifying Life Events Quick Reference Guide Miss it and you wait until the next open enrollment.
Paying for Care and Submitting Claims
Most plans issue a debit card tied to your FSA balance. Swipe it at the pharmacy, doctor’s office, or dentist and the charge draws directly from the account. When a provider doesn’t take the card or you pay out of pocket, you submit a reimbursement claim through the plan administrator’s online portal.
Keep documentation either way. An itemized receipt showing the date of service, what was provided, and the amount charged is the standard requirement, and an Explanation of Benefits from your insurer works too. Administrators can audit transactions at any time, and claims without proper documentation may be denied or clawed back.
Run-Out Period vs. Grace Period
These two terms get mixed up constantly. A run-out period is extra time after the plan year ends to submit receipts for expenses you already incurred during the plan year. It’s a paperwork extension, typically around 90 days. A grace period, in contrast, gives you up to two and a half extra months to incur new expenses and spend down leftover funds.9Internal Revenue Service. Notice 2013-71 – Modification of Use-or-Lose Rule for Health FSAs The distinction matters when you’re deciding how hard to push spending at year-end.
Use-It-or-Lose-It, Grace Period, and Carryover
FSAs run on a use-it-or-lose-it rule. Anything left in the account when the plan year closes, after any applicable grace period or carryover, is forfeited. Most plans track the calendar year, but some use a different fiscal cycle.9Internal Revenue Service. Notice 2013-71 – Modification of Use-or-Lose Rule for Health FSAs
Employers have two options to soften the rule, and can offer only one:
- Grace period: up to two months and 15 days after the plan year ends to incur new eligible expenses using leftover funds
- Carryover: up to $680 of unused funds can roll into the 2026 plan year, with anything above that amount forfeited
An employer can offer a grace period or a carryover for a given plan year, but never both.9Internal Revenue Service. Notice 2013-71 – Modification of Use-or-Lose Rule for Health FSAs Some employers offer neither, in which case every dollar has to be spent within the plan year. Estimate your out-of-pocket spending conservatively rather than maxing out and hoping for the best.
What Happens When You Leave Your Job
Unused funds are generally forfeited when you separate from your employer. You can submit claims for expenses you incurred while still employed, but once coverage ends, so does your access to the account. The remaining balance reverts to the employer’s plan.
One potential lifeline is COBRA continuation coverage, which can include health FSAs.10U.S. Department of Labor. FAQs on COBRA Continuation Health Coverage for Workers COBRA for an FSA only makes financial sense if you’ve contributed more than you’ve spent. If you front-loaded your spending and used more than you’d put in before leaving, COBRA usually won’t be offered because the account has no positive balance from the employer’s perspective.
General Purpose FSA and HSA Eligibility
If you’re enrolled in a High Deductible Health Plan with a Health Savings Account, you cannot also have a general purpose FSA. The IRS treats the combination as disqualifying you from HSA contributions, because the FSA covers the same broad range of medical expenses the high deductible plan is meant to expose you to.4Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
The workaround is a Limited Purpose FSA, which reimburses only dental, vision, and preventive care. Because it doesn’t touch general medical costs, it preserves your HSA eligibility while still giving you pre-tax savings on two categories of care that tend to be expensive and predictable. Contribution limits, use-it-or-lose-it, and carryover provisions all work the same way, just with a narrower list of eligible expenses.4Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans If your employer offers both an HDHP with HSA and an FSA, make sure you’re picking the limited purpose version.