Glossary > Employment Law > Benefits And Compensation > General

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is a benefit offered by some employers that allows employees to set aside a portion of their pre-tax earnings to pay for eligible medical expenses or dependent care expenses. The money in an FSA is not subject to income tax, which can lead to savings for the employee on qualifying expenses.

Example #1

For example, if an employee elects to contribute $2,000 to their FSA for the year to cover medical expenses such as prescription medications, doctor visits, or co-pays, that $2,000 is deducted from their paycheck before taxes are calculated, resulting in lower taxable income.

Example #2

Another example is using an FSA to pay for daycare or after-school care for a child, thereby reducing taxable income and providing savings on childcare costs.

Misuse

A misuse of an FSA could occur if an employee tries to claim expenses that are not considered eligible under the plan, such as using FSA funds for cosmetic procedures or over-the-counter medications that are not prescribed by a doctor. This is important to prevent because improper use of FSA funds can lead to tax penalties for the employee and potential legal issues for the employer.

Benefits

One significant benefit of an FSA is the tax savings it offers to employees. By contributing to an FSA, employees can reduce their taxable income, which effectively lowers the amount of income tax they owe. This can result in considerable savings, especially for individuals with high medical or dependent care expenses.

Conclusion

Flexible Spending Accounts can be valuable tools for employees to manage their healthcare and dependent care expenses efficiently while benefiting from tax savings. It's important for employees to understand the eligible expenses and rules of their FSA to avoid potential misuse and maximize the benefits it offers.

Related Terms

Health InsuranceEmployee Benefits