22 October 2009
Health Flexible spending account's (FSA's) are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan.

A health FSA allows employees to be reimbursed for qualified medical expenses, including co-pays, eyeglasses and prescription and over-the-counter medicine. FSAs are usually funded through voluntary salary reduction agreements with your employer.

You may enjoy several benefits from having an FSA.
  • Contributions made by your employer can be excluded from your gross income.
  • No employment or federal income taxes are deducted from the contributions.
  • Withdrawals may be tax-free if you pay qualified medical expenses.
  • You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.


You contribute to your FSA by electing an amount to be withheld from your pay by your employer. At the beginning of the plan year, you must designate how much you want to contribute. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change the amount you designate at the beginning of the plan year only if a specified event occurs. Examples include marriage, divorce, birth or death of a child, loss of coverage under other insurance, and a change in employment status.

You aren't taxed on the salary you contribute or the amounts your employer contributes to the FSA. However, contributions made by your employer to provide coverage for long-term care insurance must be included in income.

Usually, the amount of money you contribute that isn't spent by the end the plan year is forfeited. In other words, the money is use-or-lose. But some plans contain a provision that allows you an additional 2 1/2 months to use the money. Be sure to base your contribution on a reasonable estimate of the qualifying expenses you expect to have during the year. Because of the tax savings, an FSA may be advantageous even if you have a small amount of money you'll have to forfeit.

You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense. You must also provide a written statement that the expense has not been paid or reimbursed under any other health plan coverage.

Dependent Care FSAs

FSAs can also be established to pay for dependent (usually child) care. The amount you can set aside for dependent care generally is limited to $5,000 a year.

Although you receive a tax advantage with a health FSAs, dependent care FSAs are a tradeoff between pre-tax deductions and tax credits, such as the Child Care Credit. Generally, the higher your income, the lower the Child Care Credit you'll receive due to income phase outs. Check with your tax professional to see which is more beneficial to your situation.
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Topic: Credits and Deductions