Flexible Spending Accounts (FSA)

The out-of-pocket medical and dependent care expenses that you pay each year can quickly add up to hundreds, or even thousands, of dollars. Ordinarily, these expenses are paid with after-tax money. When you offer a Flexible Spending Account (FSA) plan, you can use pretax salary dollars to pay for these expenses — often at significant savings for your employees families.

Significant Savings

With an FSA, the money you are using to pay for medical and/or dependent care expenses is tax-free. You pay less in federal, state and FICA taxes throughout the year. As a result, you may have more disposable income.

Medical Expenses

Your medical FSA can be used to cover a variety of medical expenses incurred by you, your spouse and your dependents. Doctor visits, chiropractor fees, prescription drugs, dental care and vision care are all eligible medical expenses.

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Dependent Care Expenses

Eligible dependent care expenses include in-home child care, payments to licensed day care facility, before- or after-school programs or elder care.

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How It Works

During the enrollment period, you estimate how much you expect to spend on medical and dependent care expenses during the plan year. That money is deducted from your salary on a pretax basis throughout the year. When you incur an expense, you submit a claim. If you have funds in your account and the expense is eligible under your account, you will be reimbursed for the cost.

How It Works

An FSA works like an annual household budget. You estimate your eligible expenses for the upcoming plan year and, before the plan year begins, you specify the amount of money you want to allocate to your medical and/or dependent care FSA. The money you set aside is automatically deducted from your salary on a pretax basis and deposited into your FSA before federal, state and FICA taxes are withheld. You cannot change your elected amounts during the plan year unless you have a change in status as defined by the IRS. Changes may include: marriage or divorce, the gain or loss of a spouse or dependent child, your spouse becomes eligible for or loses medical coverage, your spouse starts or stops working full-time.

Reimbursements: Quick and Efficient

After you incur your medical or dependent care expenses, you simply file a claim along with third-party documentation (such as an explanation of benefits) for reimbursement of your eligible expenses. After your claim is processed, you will be reimbursed by check or in some cases a direct deposit.

Use It or Lose It The IRS's "use it or lose it" rule states that you will lose any money left in your account at the end of the plan year. There is, however, a short grace period (called a "run-out" period) after the plan year ends. During the run-out period, you can still submit claims for expenses incurred during the plan year. (Check your Summary Plan Description or Benefits Handbook for more specific information.)

If You Terminate Employment If you terminate employment during the plan year, you may have a period of time after termination (a run-out period) to submit claims for reimbursement. Services rendered for health care expenses must be incurred prior to the termination date unless you continue contributing to your medical FSA account through COBRA. You will have until the completion of the plan year run-out period to submit your dependent care expenses incurred during the entire plan year as long as you were working or seeking work during that time.