Define: Flexible Savings Account (Fsa)

A Flexible Savings Account (FSA) allows employees to set aside money from their paychecks for medical expenses. Both the employee and employer determine the amount to be deducted from the paycheck and deposited into the FSA. The funds in the FSA can be used for medical costs such as doctor visits, medication, and medical equipment. The advantage of an FSA is that the deposited money is not subject to taxes, providing potential tax savings for the employee. However, the funds in the FSA typically must be used within a specified time period, usually a year.

A Flexible Savings Account (FSA) is a specialized account that allows employees to allocate pre-tax funds from their salary to cover eligible medical expenses. The FSA is typically funded through a voluntary agreement between the employee and their employer to reduce the employee’s salary. The employee can contribute to the FSA by authorizing their employer to deduct a specific amount from their salary and deposit it into the FSA. Employers may also make contributions to the FSA as part of the benefits plan. For instance, if an employee with a $50,000 salary chooses to contribute $2,000 to their FSA, their taxable income for the year will decrease to $48,000, resulting in lower taxes. The FSA has a contribution limit of $2,750 per employer/employee for the year 2021. The employee can adjust their contribution amount or cancel the salary reduction agreement, subject to applicable laws and the employer’s benefits plan. Unused funds in the FSA may be carried over to the following plan year, depending on the employer’s benefit plan. Employees commonly use FSA funds to cover medical expenses not covered by insurance, such as co-pays, deductibles, prescriptions, over-the-counter medications, and medical equipment. For example, if an employee needs to pay a $50 co-payment for a doctor’s visit, they can use their FSA funds. Having an FSA provides employees with tax benefits to help with healthcare costs. Employer contributions to the FSA are excluded from the employee’s gross income for tax purposes, and no employment or federal income taxes are deducted from FSA contributions. Reimbursements for qualified medical expenses may also be tax-free for the employee.

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This glossary post was last updated: 16th April 2024.