What Is a Flexible Spending Account?
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What Is a Flexible Spending Account?
A flexible spending account (FSA) is an employee benefit authorized by the IRS code that allows you to save before-tax dollars on certain healthcare and dependent care costs. To get one, your employer must offer this benefit and you must sign up, designating what amount of money you want to be deducted from your pay on a yearly basis. Once you have funds in a dependent care flexible spending account, you can either directly use those funds to pay for qualified expenses or use those funds to reimburse yourself for qualified expenses you have already incurred. The entire amount you elect to contribute to a healthcare flexible spending account is available the first day of the plan year to pay for qualified expenses. Many employers provide debit cards that you can use to pay for healthcare or dependent care expenses when incurred. Many healthcare expenses traditionally not covered by insurance companies, such as over-the-counter medications, prescription eyeglasses and hearing aids, are covered by FSAs. However, a doctor’s prescription (or note) is now needed for over-the-counter medicines to be reimbursed through an FSA or HSA.
Things To Know
- You can use pre-tax dollars to save on medical and childcare costs.
A big plus
Establishing an FSA carries a significant tax advantage—because you contribute to your FSA account with your pay before taxes are taken out, those dollars could ultimately be worth 30 to 40 percent more than the after-tax dollars that you would have otherwise used. Here’s an example of how it works: if you contribute $1,500 to an FSA, you’ll incur a tax savings of approximately $525. The $525 is the 35 percent that your employer would have taken out of your pay otherwise to cover tax obligations such as Social Security and federal and state income taxes. (That’s 7.65% Social Security, 22% federal, and 5% state in this example.) So, by participating in a flexible spending account, you have that extra $525 to spend on healthcare and dependent care expenses that you likely would have incurred regardless. With that said, your savings will vary depending upon which tax bracket you fall into. The lower your tax bracket, the lower your tax savings will be.