flexible savings account (FSA)

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A Flexible Savings Account (FSA) is a special type of account usually funded through a voluntary salary reduction agreement between an employee and its employer. Under such an agreement, the employee contributes to the FSA by allowing their employer to withhold from their salary and deposit in the FSA a specified amount of money. Said amount is deducted by the employer periodically; from every paycheck or as otherwise agreed upon with the employer. If established in the employer-provided benefits plan, the employer may also make contributions to the FSA.

The employee may choose to change the amount of the monetary contribution or revoke the salary reduction agreement, provided the applicable law and the employer-provided benefits plan allow it. For the year 2021, FSA contributions can be for an amount up to $2,750 per employer/employee. This amount may change from year to year. Although the employee should use the money deposited in the FSA within the plan year, the employee may be able to carry over unused money to a plan year ending the following calendar year. This arrangement will depend on the conditions of each employer-established benefit plan.

Considering the FSA is an employer-established benefit plan, employers have the flexibility to design their benefit plans and to offer the FSA in combination with other employer-provided benefits. A self-employed person is not eligible to have an FSA.

Employees commonly use the money available in the FSA to pay out-pocket qualified medical expenses not covered by insurance, such as co-payments, deductibles, prescription medications, over-the-counter medicines, and medical equipment. An employee may use the FSA to pay qualified medical expenses even if it has not yet placed funds in the account. Qualified medical expenses are those incurred by the employee, the spouse, any dependents claimed on its tax return, or a child under age 27 at the end of the tax year. The employee may not use the FSA to pay amounts for health insurance premiums, long-term care coverage or expenses, or other amounts covered under another health plan.

Having an FSA provides employees with tax benefits to offset health care costs, such as the following:

  • Contributions made by the employer can be excluded from the employee’s gross income, which is used for taxation purposes.
  • No employment or federal income taxes are deducted from the contributions made to the FSA.
  • Reimbursements may be tax-free if the employee pays qualified medical expenses.

[Last updated in July of 2021 by the Wex Definitions Team]