A flexible spending account (FSA), also known as a flexible spending arrangement, is a tax-advantaged financial account in the United States that allows individuals to set aside money from their paycheck on a pre-tax basis to pay for qualified medical expenses. This means that the money set aside in an FSA is not subject to payroll taxes, resulting in tax savings. Qualified expenses include insurance copayments, deductibles, prescription drugs, insulin, and medical devices. There are different types of FSAs, such as Health Care FSA (HCFSA), Limited Expense Health Care FSA (LEX HCFSA), and Dependent Care FSA (DCFSA) .
FSAs are offered as an employee benefit, and the amount that can be contributed to an FSA is determined by the employer. Any unused funds in the FSA at the end of the plan year can be handled in one of two ways: the employer may offer a grace period of 2.5 months to spend the remaining money, or allow a carryover of up to $500 to the next plan year. Its important to note that the employer can choose only one of these options, not both.
In summary, a flexible spending account provides a way for individuals to save money on taxes by using pre-tax dollars to pay for eligible medical expenses, making it a valuable financial tool for managing healthcare costs.
