A flexible spending account (FSA) is a tax-advantaged employee benefit program that may be applied toward qualifying out-of-pocket health care and dependent care expenses. The deductions are pre-taxed and can be withdrawn by the employee anytime within the benefit period, or the plan year.  

Types of Flexible Spending Accounts

There are three types of flexible spending accounts an employee may elect. They are the Health Care Flexible Spending Account (HCFSA), the Limited Expense Health Care Flexible Spending Account (LEX HCFSA) and Dependent Care Flexible Spending Account (DCFSA).

A Health Care Flexible Spending Account can be applied toward health care costs normally paid by your insurance or a Federal Employees Health Benefits plan. This excludes insurance premiums of any form. A Limited Expense Health Care Flexible Spending Account, on the other hand, allows only those enrolled in a Federal Employees Health Benefits program or a Health Savings Account High Deductible Health Plan to save their Health Savings Account funds and pay for qualifying dental and vision expenses with their LEX HCFSA savings.

The third type of flexible spending account, the Dependent Care Flexible Spending Account, differs from the Health Care Flexible Spending Account and the Limited Expense Health Care Flexible Spending Account in that its savings can be used toward other family members. Dependent care coverage includes children under the age of 13, as well as spouses, in-laws, parents and other family members of any age who cannot care for themselves due to mental or physical handicaps. Like the Health Care Flexible Spending Account and the Limited Expense Health Care Flexible Spending Account, a Dependent Care Flexible Spending Account is voluntary, effective for one benefit period and requires re-enrollment at the beginning of each plan year.

Benefits of Creating an FSA

Creating a flexible spending account can end up helping you save money, as long as you plan well. As authorized by the Internal Revenue Service (IRS), a flexible spending account is not subject to payroll taxes. Employees who elect a flexible spending account can lower their taxable income and thus, reduce their income taxes and their social security taxes.

It is recommended that thorough research is conducted prior to the creation of a flexible spending account. For instance, an employee wishing to elect a flexible spending account to save up for laser eye surgery should visit at least one specialist who can evaluate his or her specific condition and present a valid estimate. The estimate can help the employee map out his or her flexible spending account and determine the appropriate deduction amount. One thing to remember when creating a flexible spending account is that the money does not roll over. Therefore, you will not want to save more than you can spend. Any amount not spent by the end of the plan year will be forfeited.

Overall, all three types of flexible spending accounts are extremely beneficial if the elector knows exactly where his or her savings will go. No one should ever create an account blindly. The only way to ensure that all benefits of a flexible spending account will be received is to perform careful research, then plan accordingly.