Definition of Flexible Spending Account (FSA)

Flexible Spending Account

What is a flexible spending account (FSA)?

A flexible spending account (FSA) allows eligible employees to set aside pre-tax money via payroll deductions into a tax-free account and use this money to pay for eligible healthcare expenses. Some things to know about FSAs:

  • Money in an FSA that isn’t used up by the end of the year is forfeited, save for the $500 that employers can allow employees to carry over into the next year
  • FSA funds do not have to be paid back to the employer if the employee becomes terminated or quits partially through the year

Why are FSAs important to a small business?

Offering an FSA is a win-win for employers and employees. It helps reduce the tax burden for both, and minimizes out-of-pocket spending on healthcare items for workers.

What is the history of FSAs?

In the late 1960s in the United States, employers started facing increased costs of employer-sponsored health benefits due to inflation and other factors. As a result, they started instituting annual deductibles and coinsurance on their health benefits plans; some also excluded coverage for certain medical items such as dental, vision, and alternative medicine.

These changes almost doubled the cost for these items for employees on an after-tax basis.

In response, the Internal Revenue Service created FSAs in the 1970s to allow workers to pay pre-tax dollars for medical and dependent care expenses that their employer-sponsored health plan doesn’t cover.

Other terms similar to FSA that can assist you

What Is an HSA?

Summary of the definition of a flexible spending account

A flexible spending account allows eligible employees to set aside pre-tax money via payroll deductions into a tax-free account. They can use this money to pay for eligible healthcare expenses. Both employers and employees receive tax savings from FSAs.

People also ask

What are the types of expenses that are FSA, HSA, and HRA eligible?

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