Flexible Spending Account (FSA)
What Is a Flexible Spending Account (FSA)?
A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax money to pay for qualified healthcare expenses. These funds can be used for medical costs such as doctor visits, prescriptions, and medical supplies.
FSAs help employees reduce taxable income while managing healthcare expenses.
Why It Matters
Medical expenses can add up quickly. By using pre-tax dollars through an FSA, employees can reduce their taxable income and save money on healthcare costs.
However, FSAs often have strict rules regarding how and when funds can be used.
How a Flexible Spending Account Works
Employees elect an annual contribution amount during their employer’s benefits enrollment period.
Key features include:
- contributions made from pre-tax payroll deductions
- funds used for eligible medical expenses
- annual contribution limits set by the IRS
Many FSAs operate under a “use-it-or-lose-it” rule, meaning unused funds may expire at the end of the plan year.
Example
An employee who expects to spend $1,000 on medical expenses may contribute that amount to an FSA and use the funds tax-free throughout the year.
FSA vs Health Savings Account
- FSAs are employer-sponsored and usually have use-it-or-lose-it rules.
- HSAs are individually owned and allow funds to roll over from year to year.
FAQs About Flexible Spending Accounts
Can unused FSA funds carry over?
Some plans allow a limited rollover, but many follow a use-it-or-lose-it rule.
What expenses qualify for FSA spending?
Qualified medical expenses such as prescriptions, copayments, and medical supplies.
Who owns the FSA account?
The employer sponsors the account, and funds are tied to employment.
Related Terms
- Health Savings Account (HSA)
- Health Care Reimbursement Accounts
- Healthcare Costs
- Medical Expenses
- Employee Benefits
