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What is a Flexible Spending Account?
Flexible Spending Account (FSA) - also commonly referred to as an
FSA, a Flex Plan or a Section 125 Cafeteria Plan - is an employee benefits
plan regulated by Section 125 of the Internal Revenue Code. FSAs allow
employees to have money withheld from their paychecks on a pre-tax basis,
and use this money for qualified medical or dependent care expenses.
View Expense and Savings Example
Using an FSA, employees and employers can shield
thousands of dollars of expenses annually, resulting in
substantial tax savings. FSA contributions are sheltered
from FICA, Medicare, federal income and unemployment
taxes, as well as state income and unemployment taxes.
By reducing their taxable income, participating
employees increase their level of "take-home" pay.
An employee that is paying $5,000 per year for child day
care can easily save over $1500 per year in taxes, and
the company will save over $380 on that employee alone.
How Flexible Spending Accounts Work
The amounts withheld from participants' paychecks are
deposited into a dedicated checking account. Amounts
must be tracked carefully, as each participant is
entitled to expense reimbursements equal to the amount
being withheld. As expenses are incurred, the
participant pays for them out of his/her pocket, submits
proof of the expense, and is then reimbursed from the
FSA checking account.
FSAs are tracked in 12-month periods called Plan Years.
Participants define the amount they want to contribute
during the Plan Year. The elected amount is withheld
equally from each paycheck during the year. This amount
can only be changed in the event of a "Change in Family
Status"; a closely defined event including:
- Change in marital status
- Birth/adoption of a child
- Death of a dependent
- Change in work status (to/from full-time or part-time)
Expenses for the full amount withheld must be
incurred during the Plan Year. Expenses incurred
during the Plan Year can be submitted during a grace
period (usually 90 days) after the end of the year,
but expenses incurred outside a Plan Year are not
Any money not claimed by the employee during a Plan
Year becomes forfeit. This unclaimed money at the
end of the grace period can be used:
- To defray plan administrative costs
- For other employee benefits
- As equally distributed refunds to all participating employees
Expense and Savings Example
Below are a few example expenses, at their average cost,
that employees may have. A total estimated cost is
listed. Assuming the medical FSA is elected in this
amount, both the employer and the employee can realize
* The average contribution is $908 per the Journal of Health Economics.
Learn how to set up your own flexible spending account.
Download a list of expenses eligible for FSA reimbursement.