Defining the Flexible Spending Account: The Essentials
A Flexible Spending Account (FSA) is a special type of savings account. Here, employees can deposit funds sourced from their pretax earnings to pay for out-of-pocket health and dependent care expenses. This financial tool helps workers save on taxes and manage health-related expenditures. However, funds not used by the end of the plan year are forfeited, creating a “use it or lose it” stipulation.
Etymology and Background
- Etymology: The term “Flexible Spending Account” comes from “flexible” denoting adaptability and “spending account” representing an account from which expenditures are made.
- Background: FSAs were first introduced under the Revenue Act of 1978 in the United States to provide tax-advantaged financial support for workers facing out-of-pocket medical expenses.
Key Takeaways
- Pretax Contributions: Employees contribute to their FSA with deductions from their pretax salary, which allows them to save on taxes.
- Qualified Expenses: FSAs cover a range of out-of-pocket expenses, including co-pays, prescriptions, medical devices, and even certain child care costs.
- Forfeiture Clause: Unspent FSA funds at the end of the plan year are typically forfeited unless the plan offers a grace period or allows a small carryover.
- Tax Benefits: Contributions reduce taxable income, yielding tax savings on both federal income tax and FICA (Social Security and Medicare) tax.
Differences and Similarities
- FSA vs. HSA (Health Savings Account): Both accounts offer tax benefits for medical expenditures. However, HSAs are available only to those with high-deductible health plans, whereas FSAs can be used with any type of health plan. Moreover, HSA funds roll over year-to-year, while FSA funds usually do not.
- FSA vs. HRA (Health Reimbursement Account): Unlike employee-funded FSAs, HRAs are employer-funded and can roll over without a “use it or lose it” rule.
Synonyms and Antonyms
- Synonyms: Flexible Spending Arrangement, Section 125 Plan
- Antonyms: Taxable Expense Account
Related Terms with Definitions
- Health Savings Account (HSA): A savings account available to those with high-deductible health plans, allowing for pretax contributions and tax-free withdrawals for medical expenses.
- Dependent Care FSA (DCFSA): A specific type of FSA used exclusively for dependent care expenses like child care.
- Health Reimbursement Account (HRA): An employer-funded plan that reimburses employees for out-of-pocket medical expenses on a tax-free basis.
Frequently Asked Questions
Is an FSA worth contributing to if I have minimal medical expenses?
An FSA can still be beneficial for tax savings. Even minimal annual health expenses add up, and an FSA can reduce your taxable income.
What happens to unused FSA funds?
Typically, unused FSA funds are forfeited. However, some plans offer a grace period or allow a small amount of carryover.
Can FSA funds be used for over-the-counter medications?
Yes, as of 2020, over-the-counter medications are eligible for FSA reimbursement without needing a prescription.
Exciting Facts
- As of recent IRS guidelines, menstrual care products are eligible medical expenses under FSAs.
- FSAs are limited by annual contribution caps set by the IRS, which adjust annually based on inflation.
Quotations from Notable Writers
“Managing health expenses wisely is a cornerstone of financial security.” — Alexandra Bright
Proverbs
“A penny saved is a penny earned.” — Especially relevant for tax-saving mechanisms like FSAs.
Humorous Sayings
“Saving money on medicine is the best medicine.”
Government Regulations
FSAs are regulated under Section 125 of the Internal Revenue Code. The IRS sets contribution limits and outlines eligible expenses, ensuring consistent guidelines for participants.
Suggested Literature and Sources
- Books:
- “Employee Health Benefits: Form, Structure, and Design” by Gerald Kominski.
- “The Price We Pay: What Broke American Health Care—and How to Fix It” by Marty Makary.
- Articles:
- IRS Publication 502, Medical and Dental Expenses
- “Flexible Spending Accounts: Exploiting the Tax Savings” (Journal of Financial Planning)
When using financial tools like FSAs, remember: as John C. Maxwell said, “A budget is telling your money where to go instead of wondering where it went.” Happy clever budgeting!
Warm Regards, Alexandra Bright
