FSA, commonly known as the abbreviation for Flexible Spending Account, refers to a type of arrangement in the United States that enables employees to set aside pre-tax dollars from their salaries to use for eligible medical, dental, vision, and dependent care expenses. It is an employer-sponsored benefit that aims to help individuals manage and save money on healthcare and dependent care costs.
A Flexible Spending Account operates on a use-it-or-lose-it principle, meaning funds must be used within the designated plan year, typically corresponding to the calendar year. Any remaining balance at the end of the plan year is forfeited unless the employer allows a grace period or a carryover of funds, which is subject to certain limitations. Contributions to an FSA are made on a pre-tax basis, which means that they are deducted from the employee's gross pay before federal and state income taxes, as well as Social Security and Medicare taxes, are calculated. As a result, participants may save on taxes by lowering their taxable income.
FSAs can be used to cover various eligible expenses such as copayments, deductibles, prescription medications, prescription glasses, contact lenses, orthodontics, and other qualified healthcare costs. In the case of dependent care FSAs, they can be utilized to pay for qualified childcare expenses for dependent children, elderly parents, or disabled family members.
While FSAs offer potential tax advantages and cost savings, it is crucial for individuals to plan their contributions carefully, as any unused funds at the end of the plan year are generally forfeited. Employers often provide information and guidelines to employees for maximizing the benefits of an FSA and understanding the eligible expenses it covers.
