What is a flexible spending account?


What is a flexible spending account?

A flexible spending account, or FSA, is a benefit which allows employees to have funds deducted from their paycheck pre-tax to pay for out-of-pocket medical, dental and vision expenses.  Depending on the type, a plan may also be established to reimburse out of pocket daycare expenses.  These plans are offered to employees by employers and are regulated by IRS Code Section 125.

There are several benefits to participating in an FSA. Some of these benefits include:

  1. Save Money

By participating in an FSA, employees save money because they pay less in taxes. Funds for the benefit are deducted from the employee’s income before taxes, which lowers the amount of taxable income.  Depending on their tax bracket, an employee can save 20% – 40% in taxes.

  1. Set Money Aside for Expenses

Money is set aside for expenses both planned and unplanned. The total amount elected for a medical FSA is available from the start of the plan year or the effective date of the enrollment, even though all the funds have not been contributed.  This allows funds to be available for those unexpected expenses that might come up.

Dependent daycare FSA funds are only to be used as they are deducted from the employee’s paycheck.

There are many plan design options available for FSAs, so it’s important that employers communicate with employees about these plans and the features available.

For more information about FSAs, visit our website at www.myCafeteriaPlan.com.


BusinessPlans, Inc. – myCafeteriaPlan does not intend to provide legal or tax advice and information contained in this article should not be interpreted as such. Regulations governing pretax plans are often open to interpretation and should be reviewed with your legal or tax advisor before making any decisions regarding your plan.