Flexible Spending Account (FSA)

What is a Flexible Spending Account (FSA)?

A Flexible Spending Account, or FSA, is a tax-exempt account designated for certain out-of-pocket health care costs. Employees contribute to FSA accounts with each paycheck. They can then turn in receipts from qualified medical expenses and use the fund to get reimbursed.

Generally, the funds in FSA accounts fall into the use-it-or-lose-it category—money not spent by December 31 doesn’t roll over to next year’s balance. Accordingly, there is a yearly contribution limit of $2,650 per year per employer. Employees who participate in FSA accounts generally use these funds to cover medical and dental copayments or coinsurance and to purchase prescription drugs or over-the-counter medications. FSA funds can also pay for medical equipment such as first aid kits, reusable wraps, and crutches.

Much like a 401k or another savings account, organizations have the option of making matching contributions to an employee’s FSA account. They can also offer an extension of up to two-and-a-half months to use last year’s funds, or apply a rollover of up to $500 toward next year’s balance.

While Flexible Spending Accounts and Health Savings Accounts both involve employees setting aside funds from their paychecks for medical expenses, there are major differences in how each account works and the requirements to implement each one. In general, If your organization offers one or both of these accounts, you will need to educate your employees on the difference between the two programs and clarify which program(s) you offer.