Definition of Flexible Spending Account (FSA)
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
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.