What is a flexible spending account (FSA)?
A flexible spending account (FSA) is a type of savings account that offers specific tax advantages to the account holder. An FSA, sometimes called a flexible spending arrangement, is put in place by an employer for an employee. The account allows employees to contribute a portion of their regular earnings to pay eligible expenses related to medical and dental expenses.
Another type of FSA is a flexible expense account for dependents, which is used to pay for child care for children 12 and under and can also be used to pay for the care of eligible adults, including a spouse, who cannot take care of themselves. and meet specific IRS guidelines. TheAn FSA for dependents has different maximum contribution rules than a flexible medical expense account.
Key points to remember
- An FSA is a type of savings account that allows employees to contribute a portion of their regular income to pay for eligible expenses.
- Funds paid into the account are deducted from the employee’s earnings before being subject to payroll taxes.
- The money in an FSA must be used before the end of the plan year, but employers can offer a grace period of up to 2.5 months, until March 15 of the following year.
Operation of a flexible spending account (FSA)
One of the main advantages of a flexible spending account is that the funds paid into the account are deducted from the employee’s pre-tax income, which reduces their taxable income. As such, regular contributions to an FSA can significantly reduce an employee’s annual tax liability.
The IRS limits the amount that can be paid into an FSA account per year. For FSA medical expense accounts, the 2020 limit per employee is $ 2,750 (it was $ 2,700 in 2019). If a person is married, their spouse can also set aside this limit through their employer. Employers can choose to contribute to an FSA, but they are not required to do so – if they do, the employer’s contribution does not reduce the amount the employee is allowed to contribute.
Advantages and disadvantages of flexible spending accounts (FSA)
Funds from an FSA may be used to pay for certain authorized dental, visual and medical expenses, including for dependents and spouses.
Account funds can also be used to cover deductibles and co-payments when medical services are rendered. Unfortunately, the money cannot be used to pay insurance premiums.
Prescription drugs, over-the-counter drugs that have been prescribed by a doctor can be paid for with money from an FSA. This includes reimbursement for insulin. Purchases of medical equipment, such as diagnostic devices, bandages and crutches, may be covered by the FSA.
All money set aside in an FSA must generally be used before the end of the plan year, but employers can offer a grace period of up to two and a half months to finish using this funding.
If this option is not chosen, employers could let workers withdraw more than $ 500 a year from unused funds in their accounts. These options do not have to be offered by an employer. If this is the case, the employer can only offer one of these options.
When the end of the year or the grace period expires, all funds remaining in the FSA are lost. This forces FSA holders to try to carefully plan the amount of money that will go into the account and how they will spend it during the year.