What is a Flexible Spending Account?

A flexible spending account or flexible spending arrangement (FSA) refers to a number of programs in place in the United States, in which employees and employers may participate. Through FSAs, employees can make pre-tax contributions to pay for certain types of qualified expenses. This money is not taxed and usually comes right out of an employee’s paycheck. These contributions, within certain guidelines, may then be used to pay for certain medical, dependent care, and other qualifying expenses.

Employees can use their flexible spending account to pay for related medical care costs. This can include paying for things like insurance copayments, prescriptions, and over the counter drugs. Many plans now come with an ATM card that can be used to make reimbursements easier. Otherwise, employees must file receipts with FSA companies in order to get repaid for costs. Usually, a person can’t use the FSA amounts to purchase health insurance or to pay for optional medical care expenses like plastic surgery.

FSAs that allow people to pay for dependent care expenses like preschool, child care, or dependent care costs for seniors generally have limited contributions. The US government will only allow $5,000 US Dollars (USD) of dependent care expenses to be non-taxable. There are special tax laws, which may limit contributions more, especially if only one spouse works. Employers can also decide to place a cap on the amount of money any one employee can contribute to a flexible spending account.

The type of plan offered by a company can be variable and participation by employees is voluntary. When a person participates, they designate a specific amount per paycheck to be deposited in the flexible spending account. This amount is static for the plan year and usually cannot be changed until the plan year is over.

Some people find great benefit in using a flexible spending account. Known medical expenses like payments for orthodontic care or regular prescriptions can be paid for by the plan. The advantage is the money designated to the FSA doesn’t get taxed and reduces gross income. It is a good idea to check with the plan to see which expenses are “allowable” or covered.

There are important rules regarding use of the flexible spending account, which all people should consider before participating in one. If the employee doesn’t spend the money in the FSA by the end of the year, or a short grace period thereafter, it cannot be reclaimed. It’s vital to understand the use it or lose it aspect of FSAs before determining amount to contribute.

Many employers take a risk by offering these accounts too. An employee can theoretically spend all money available for the plan year, before it is removed from paychecks. If the employee loses a job before the end of the plan year, the employer must pay these expenses. This is only the case when the money is designated for health expenses. With FSAs that cover dependent care expenses, the money deposited can only be used as it accumulates.