Flexible Spending Account (FSA)

What is an FSA?

A Flexible Spending Account (FSA), also known as a Flexible Spending Arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of earnings to pay for qualified expenses as established in the cafeteria plan. Money deducted from an employee’s pay into an FSA is not subject to payroll taxes, resulting in substantial payroll tax savings.

An FSA is set up by the employer. What makes it flexible? It works with any employer-sponsored health plan. An FSA is most commonly used for medical expenses but is often used for dependent care or other expenses.

Here are more facts about an FSA:

  • Only the employee and the employer can put money into the account.
  • The employee can only deposit money in their FSA that’s been taken out of their paycheck by the employer. That money isn’t taxed.
  • Any money left in the account at the end of the year goes back to the employer.
  • One significant disadvantage to using an FSA is that funds not used by the end of the plan year are lost to the employee, known as the “use it or lose it” rule.
  • The employer owns the account, but the employee get to decide what medical expenses to pay from their FSA.
  • Paper forms or an FSA debit card, also known as a Flexcard, may be used to access the account funds.
  • The employee can not invest the money.

While HSAs and HRAs are almost exclusively used as components of a consumer-driven health care plan, medical FSAs are commonly offered with more traditional health plans as well.

Combining an FSA with an HRA or HSA allows employees to bridge the gap between the employer sponsored HRA and the health insurance plan.

In a situation where an incurred medical expense could be reimbursed from either the FSA or HRA, the employer or plan administrator will determine the “ordering rules” which determine which account the expense shall be reimbursed from first.

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