Flexible spending accounts allow US employees to make pre-tax contributions to pay for eligible expenses such as medical and dependent care costs. Contributions are usually deducted from an employee’s salary and can be reimbursed through receipts or an ATM card. However, any unused funds at the end of the year cannot be recovered. Employers may also limit contributions and take on the risk of paying expenses if an employee loses their job.
A flexible spending account or flexible spending arrangement (FSA) refers to several programs in effect in the United States that employees and employers can participate in. Through FSAs, employees can make pre-tax contributions to pay for certain types of eligible expenses. This money is not taxed and usually comes out of an employee’s salary. These contributions, within certain guidelines, may be used to pay for certain medical, dependent care and other eligible expenses.
Employees can use their flexible spending accounts to pay for healthcare-related costs. This can include paying for things like insurance copayments, prescriptions, and over-the-counter drugs. Many plans now come with an ATM card that can be used to facilitate refunds. Otherwise, employees must file receipts with FSA companies to be reimbursed for costs. Typically, a person cannot use FSA amounts to purchase health insurance or pay for optional medical care expenses such as plastic surgery.
FSAs that allow people to pay dependent care expenses such as preschool, childcare, or elderly dependent care costs often have limited contributions. The US government will only allow $5,000 (US Dollars) of dependent care expenses to be non-taxable. There are special tax laws, which may further limit contributions, especially if only one spouse works. Employers can also decide to limit the amount of money any employee can contribute to a flexible spending account.
The type of plan offered by a company can vary and employee participation is voluntary. When a person participates, they designate a specific amount per salary to be deposited in the flexible spending account. This value is static for the planned year and generally cannot be changed until the planned year ends.
Some people find great benefits in using a flexible spending account. Known medical expenses, such as payments for orthodontic care or regular prescriptions, may be paid for by the plan. The advantage is that money assigned to the FSA is not taxed and reduces gross income. It’s a good idea to check with the plan which expenses are “allowed” or covered.
There are important rules about using the flexible spending account that everyone should consider before joining one. If the employee does not spend the money on the FSA by the end of the year or after a short grace period, it cannot be recovered. It is vital to understand the use-it-or-lose-it aspect of FSAs before determining the amount to contribute.
Many employers take a risk by offering these accounts as well. Theoretically, an employee can spend all of the money available for the plan year before it is removed from paychecks. If the employee loses a job before the end of the plan year, the employer must pay these expenses. This is just the case when the money is earmarked for health expenses. With FSAs covering dependent care expenses, the money deposited can only be used as it accumulates.
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