What is a Flexible Spending Account (FSA)?
A Flexible Spending Account (FSA) is a type of savings account that allows employees to set aside pre-tax dollars from their paychecks to pay for certain eligible expenses, such as healthcare or dependent care expenses.
FSA funds are not subject to federal income tax, Social Security tax, or Medicare tax, which can result in significant tax savings for the employee. However, FSA funds must be used within the plan year, or else they will be forfeited.
How Does a Flexible Spending Account Work?
A Flexible Spending Account (FSA) allows employees to set aside pre-tax dollars from their paychecks to pay for eligible expenses, such as healthcare or dependent care expenses. The amount of money an employee elects to contribute to their FSA is deducted from their paycheck before taxes are taken out, reducing their taxable income and resulting in significant tax savings.
The funds in an FSA are intended to be used to pay for eligible expenses incurred during the plan year, which is typically the calendar year. Eligible expenses can include things like deductibles, co-pays, prescription drugs, dental and vision expenses, and certain medical treatments and procedures. For dependent care FSAs, eligible expenses can include daycare, after-school care, and elder care.
What’s Eligible for a Flexible Spending Account?
Eligible expenses for a Flexible Spending Account (FSA) depend on the specific plan, but generally, expenses that are considered “medically necessary” or related to dependent care are eligible for reimbursement from an FSA.
Here are some examples of eligible expenses for each type of FSA:
- Deductibles, copayments, and coinsurance for medical, dental, and vision care
- Prescription drugs
- Medical equipment and supplies
- Over-the-counter (OTC) medicines with a doctor’s prescription
- Certain medical treatments and procedures, such as acupuncture, chiropractic care, and physical therapy
- Daycare, preschool, and after-school care for children
- Summer day camp for children
- Elder care for a dependent adult
- Housekeeping or cleaning services that are necessary due to the dependent care situation
- Transportation to and from eligible dependent care services