Introduction to flexible spending account (FSA)
- A flexible spending account (FSA) is known as a kind of savings account that gives the account holder specific tax advantages.
- An FSA, which is also known as a "flexible spending arrangement," can be fixed up by an employer for employees.
- The account lets you contribute a portion of your regular earnings; employers can also contribute to employees' accounts.
- Distributions from the account need to be used to compensate the employee for qualified expenses related to medical and dental services.
Understanding Flexible Spending Account (FSA)
One of the chief benefits of a flexible spending account is that the funds contributed to the account are subtracted from your earnings before taxes, reducing your taxable income. Regular contributions to an FSA can decrease your annual tax liability.
The IRS can limit how much can be contributed to an FSA account each year. For the medical expense FSA accounts, the annual contribution limit for each employee is $2,750 for each of 2020 and 2021.
- In case you're married, your spouse can also put aside up to $2,750 by their employer. Employers can choose if they want to contribute to an FSA, but they do not have to—if they do, their contribution does not decrease the amount you are permitted to contribute. You are not taxed on employer contributions.
How Can You Use An FSA?
- The good news is, most of the large- to medium-sized companies offer FSAs as a benefit to employees. Smaller companies are less likely to contribute FSA options. If your company doesn't offer FSAs, it can be helpful to let your human resources department understand that it would be of interest to you.
- However, if your company does offer an FSA, you can sign up for regular paycheck deductions through your open enrollment period or whenever you make benefit changes.
- It's essential to read the rules surrounding what you can use your FSA account for and calculate your expenses for the year
Why Consider An FSA?
- The principal reason is that you will be saving money. The contributions and withdrawals you make will be tax-free, so you save money by not paying taxes on funds you used to cover medical costs.
- Those tax advantages are not the only reason to use an FSA. For healthcare FSAs, you can make use of your funds upfront — meaning you can spend the money you plan to contribute anytime.
