Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is a pre-tax savings account that individuals can use to pay for eligible medical expenses not covered by their health insurance plan. Employees agree to have a portion of their salary withheld into the FSA, which can then be used to cover out-of-pocket medical costs like co-payments, deductibles, and certain over-the-counter medications.

Example #1

An employee sets aside $2,000 in their FSA account for the year. Throughout the year, they use these funds to pay for prescription medications, glasses, and other eligible medical expenses, saving money by doing so pre-tax.

Misuse

Misuse of an FSA can occur when individuals use the funds for non-eligible expenses, such as cosmetic procedures or over-the-counter items that are not medically necessary. It is essential to protect against misuse to maintain the integrity of FSAs and ensure they are used for their intended purpose of covering medical expenses.

Benefits

One major benefit of an FSA is that it allows individuals to reduce their taxable income by contributing pre-tax dollars to the account, thereby lowering their overall tax liability. This can result in significant cost savings for individuals, especially those with high medical expenses.

Conclusion

Flexible Spending Accounts (FSAs) offer individuals a valuable tool to help manage and save on medical expenses. By contributing pre-tax dollars to an FSA, individuals can reduce their taxable income and use the funds for a wide range of eligible medical expenses. It's important to use FSAs responsibly and only for qualified medical costs to fully benefit from this valuable resource.

Related Terms

Co-PaymentDeductibleHealth InsuranceOut-of-Pocket MaximumHealth Savings Account (HSA)