Health Insurance

What Is an FSA? How Does It Work?

If you’re trying to save money on health care, an FSA can help.
A Flexible Expense Account (FSA) is an employer-sponsored benefit that allows you to pay for certain medical, vision and dental expenses not covered by your insurance plan. If you use FSA dollars to pay for health care for yourself, your spouse, or an eligible dependent, you do not pay taxes on the FSA dollars.

What is a Flexible Spending Account (FSA)?

A flexible spending account (FSA) is a savings account that offers certain tax advantages to the account holder. An FSA, sometimes called a “flexible spending agreement,” can be set up by an employer for an employee. This account allows you to contribute part of your regular income; employers can also contribute to employee accounts. Allocations from the account must be used to reimburse employees for eligible expenses related to medical and dental services.

Another type of FSA is the Flexible Dependent Care Spending Account, which is used to pay for childcare expenses for children 12 years of age and under and can also be used to pay for the care expenses of eligible adults, including spouses who are not their own to care for themselves and meet certain requirements. Some Internal Revenue Service (IRS) guidelines. Dependent FSAs have different maximum contribution rules than medical flexible spending accounts.

How does the FSA work?

An FSA is an employer-sponsored health care benefit. This means you cannot enroll in the FSA if you are self-employed. FSAs are only available to employees who work for the company offering such accounts.
If you’re wondering if an FSA is right for you, here’s some information on how these accounts work:

Salary deduction

Funding for the FSA comes from direct deductions from your paycheck. During your benefit enrollment, you decide how much of your paycheck you want to contribute to the FSA for the year, which determines how much will be deducted from each paycheck. Some employers also contribute to their employees’ FSAs, but they are not required to.


If you make $50,000 a year and you contribute $3,000 to the FSA, you’ll only be taxed on $47,000 in income. If you pay eligible expenses in FSA dollars, you don’t pay tax on your FSA dollars. You also can’t claim a tax deduction on your contributions because your FSA dollars are never taxed.

Use of FSA Funds

You will have access to your entire FSA balance at the beginning of the plan year, even if the full amount has not been deducted from your paycheck. FSAs are known for their “use it, lose it” feature, so you should only set aside money that you think you’ll need throughout the year.

Pros and Cons of a Flexible Spending Account (FSA)

FSA funds are available for reimbursement of medical expenses, which is defined to include amounts paid for the diagnosis, cure, mitigation, treatment or prevention of any disease or condition affecting any structure of the body. Surgery for cosmetic purposes and the cost of items or services for general health only, such as
The FSA covers the purchase of medical equipment such as diagnostic equipment, bandages and crutches.

Spending on prescription drugs, including over-the-counter (OTC) drugs and insulin for which you have a prescription, can be reimbursed with FSA funds. 12 The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 expanded the scope of eligible medical expenses for reimbursement in 2020 and beyond, including the cost of over-the-counter drugs without a doctor’s prescription. The law also allows the use of FSA funds to pay for menstrual products. These two CARES provisions are permanent. 13
Funds in the FSA can also be used to pay back amounts paid under plan deductibles and medical copays. Unfortunately, this money cannot be used to pay for insurance.


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