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What is a Flexible Spending Account?

Tricia Christensen
Tricia Christensen
Tricia Christensen
Tricia Christensen

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.

Money can often be moved into a flexible spending account as a paycheck deduction.
Money can often be moved into a flexible spending account as a paycheck deduction.

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.

A flexible spending account can be used to pay for child care expenses.
A flexible spending account can be used to pay for child care expenses.

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.

Many people use flexible spending accounts as a way to supplement health insurance that does not fully meet their needs.
Many people use flexible spending accounts as a way to supplement health insurance that does not fully meet their needs.

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.

Employees can use flexible spending accounts to pay insurance copayments.
Employees can use flexible spending accounts to pay insurance copayments.

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.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

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Discussion Comments

overreactor

FSA are good options for saving money, because using them one can save 30% or more of the money put into the account.

There are some drawbacks though and some careful planning has to go into it. You need to project your medical/childcare and any other covered expenses and stash that much money away.

The money has to be used within the year, otherwise, it is lost, another words, you can not carry any leftover money into the new year. In some instances the money can be used until March 15th.

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    • Money can often be moved into a flexible spending account as a paycheck deduction.
      By: highwaystarz
      Money can often be moved into a flexible spending account as a paycheck deduction.
    • A flexible spending account can be used to pay for child care expenses.
      By: Tatyana Gladskih
      A flexible spending account can be used to pay for child care expenses.
    • Many people use flexible spending accounts as a way to supplement health insurance that does not fully meet their needs.
      By: Monkey Business
      Many people use flexible spending accounts as a way to supplement health insurance that does not fully meet their needs.
    • Employees can use flexible spending accounts to pay insurance copayments.
      By: Kzenon
      Employees can use flexible spending accounts to pay insurance copayments.
    • A health care flexible spending account may be used to pay for over-the-counter medications.
      By: Tyler Olson
      A health care flexible spending account may be used to pay for over-the-counter medications.