A flexible spending account (FSA) is a type of employer-sponsored benefit program that allows employees to set aside a portion of their pre-tax salary to pay for eligible expenses. FSAs are designed to help employees save money on certain qualified expenses by using pre-tax dollars, which can result in a reduction in their overall taxable income.
There are two main types of FSAs:
- Healthcare FSA: This type of FSA allows employees to set aside pre-tax money to pay for eligible medical, dental, and vision expenses that are not covered by their health insurance plans. These expenses may include co-pays, deductibles, prescription medications, certain medical devices, and other qualified medical costs.
- Dependent Care FSA: A dependent care FSA allows employees to allocate pre-tax funds to cover eligible childcare expenses for their dependents, such as daycare, preschool, summer day camps, and after-school programs. This type of FSA is particularly useful for parents who work and require childcare services.
Typically, employees must decide how much money they want to contribute to their FSA at the beginning of the plan year during open enrollment. The funds contributed to an FSA must be used within the plan year or within a grace period provided by the employer, which is usually a few months after the plan year ends. Any unused funds at the end of the plan year or grace period are typically forfeited, known as the “use-it-or-lose-it” rule. However, some employers may offer a carryover provision or a grace period to give employees more flexibility in using their FSA funds.