Introduction to Flexible Spending Accounts

Flexible spending accounts, offered by about 80 percent of large employers, allow you to save money on health and childcare expenses by putting aside before-tax dollars from your paycheck. Although these accounts have been available in one form or another since the 1970s, only about 20 percent of eligible employees take advantage of this employee benefit. When you sign up for a flexible spending account, you designate a certain dollar amount of your paycheck to be deducted by your employer on a pro-rated basis throughout the year. Then, those dollars are available to you to reimburse yourself for qualified health and childcare-related expenses. The only catch is that the amount you can contribute is usually limited by your employer and you must spend the money you set aside within the calendar year you contribute it or a couple of months afterward. If you don’t spend those funds, you lose them.

Like many employee benefits, FSAs can have a profoundly positive effect on your finances; and like employee benefits in general, you need to understand how they work so that you don’t miss out on important opportunities to save money.