Flexible Spending Account (FSA)

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What is a Flexible Spending Account (FSA)? 

A Flexible Spending Account (FSA) refers to a type of savings account that can be set up by an employer for employees. Once a flexible spending account is established, an employee can contribute a certain portion of their earnings to it. Employers are also allowed to make contributions to an FSA. The funds of a flexible spending account can be used to reimburse employees for different types of medical and dental services. Additionally, an FSA can also be used to reimburse employees for eligible care services for young children or elderly care. 

How does a Dependent Care Flexible Spending Account (FSA) work?

In a flexible spending account, participants authorize a specific amount of money to be withheld from each pay period’s paycheck. The money withheld shall then go to the flexible spending account or FSA. The contributions to an FSA are taken from an individual’s earnings before taxes thereby decreasing the taxable income. 

The Internal Revenue Service (IRS) sets the limit to how much can be contributed to an FSA for the year: 

When filing for reimbursement, the employee must submit corresponding proof of payment and receipts. The expenses are reimbursed to the employee using the funds from the flexible spending account.

It is important to note that the money in an FSA must generally be used by the end of the calendar year. The employee has to use the funds within a specific period. Otherwise, the employee will lose the contribution and they cannot be returned through cash. 

However, employers can offer a grace period for an employee’s health FSA. The grace period is usually up to two and a half months. Another option can be to roll over up to a maximum of $550 of unused funds per year. While these two options are not required, only one option may be offered by the employer.

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