Flexible Spending Accounts
A Flexible Spending Account (FSA) is a cafeteria plan under Section 125 of the tax code and allows for benefits to be paid with pre-tax dollars which results in tax savings to both the employee and the employer. The average working employee in America spends thousands of dollars annually on certain types of medical benefits, daycare expenses and transportation services. By participating in an employer sponsored FSA, the employee funds the plan through regular pre-tax payroll deductions, which reduces his/her taxable income, and increases the percentage of pay they take home. Employees elect how much they want withdrawn from each pay period, which can be changed annually or upon a qualifying event such as marriage or divorce. The account allows them to pay for certain healthcare and other services with the account (pre-taxed dollars), in essence giving them a discount on these services. The administrator of the FSA account can issue a debit card that is tied to the FSA making it easy to use the account when needed.
Typically unused contributions at end of year are forfeited to the plan, however some employers may include provisions in their FSA plan design to allow either additional time to spend or a rollover of unused funds.
Contributions to a Flexible Spending Account (FSA) are exempt from federal income tax, Social Security tax (FICA), and in many cases, state income tax, as well as Medicare.
