What is a Flexible Spending Account (FSA)?

A Flexible Spending Account (FSA) is a type of tax-advantaged financial account that allows individuals to set aside pre-tax funds to cover eligible healthcare, dependent care, or other qualified expenses. FSAs are typically offered by employers as part of their employee benefits package. There are two main types of FSAs: Healthcare FSAs (which are covered under ERISA), and Dependent Care FSAs (which are generally not subject to ERISA).

Healthcare FSA: A Healthcare FSA allows employees to allocate a portion of their salary before taxes to pay for eligible medical expenses not covered by their health insurance plan. These expenses can include deductibles, co-payments, prescription medications, medical supplies, and dental or vision care costs. The funds contributed to a Healthcare FSA are exempt from federal income tax, Social Security tax, and, in most cases, state income tax. However, the funds must be used within the plan year, and any unused balance at the end of the plan year may be forfeited, subject to certain rules known as the "use-it-or-lose-it" rule.

Dependent Care FSA: A Dependent Care FSA allows employees to set aside pre-tax dollars to cover qualified childcare expenses for dependent children or elderly parents who require care while the employee works. Eligible expenses may include daycare costs, after-school programs, and summer camps for children, or adult day care services for elderly dependents. Like Healthcare FSAs, Dependent Care FSAs also operate on a use-it-or-lose-it basis, meaning that any funds not used within the plan year are generally forfeited.

FSAs provide a valuable way for employees to save money on healthcare and dependent care expenses by reducing their taxable income. However, it's important for individuals to carefully estimate their anticipated expenses for the plan year when deciding how much to contribute to their FSA, as any unused funds may be forfeited. Employers often offer guidance on FSA contribution limits and eligible expenses to help employees make the most of these accounts while staying within the guidelines set by the Internal Revenue Service (IRS).

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