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What Is an FSA?

FSA stands for flexible spending account. The money that goes into an FSA is tax-free. Generally, you won't pay taxes on anything you spend from an FSA as long as the money is used to pay for qualified medical expenses.

You can use FSA money for medical expenses that aren't covered by your health insurance. For instance, FSA money can be used to pay for:

  • Insurance premiums
  • Co-payments
  • Drugs or medical devices not covered by insurance plans

You can't set up an FSA if you are self-employed.

When you set up your FSA, you have to let your employer know how much money you're going to put into it for that year. There's a limit to how much money you can put into an FSA. In 2013 the limit was $2,500 for a health care FSA.

There's one important restriction on FSA money. You have to use all the money that goes into it within the year. If you don't, you lose it. The account doesn't roll over into the next tax year.