FSA: Flexible Spending Account
What exactly is an FSA?
An FSA or Flexible Spending Account is a tax-advantaged, employer-sponsored account designed to help employees with specific healthcare and dependent costs.
The account is only able to be spent on a few specific categories:
Health Care Costs: Doctor’s appointments, surgeries, copays, dental examinations, etc.
Dependent-Related Expenses: Pre-school, summer camps, day care, etc. until the dependent reaches 13 years of age.
Do I get Taxed?
No! This account is employer-sponsored and pre-tax, meaning that all money contributed by you into this account is done so before payroll taxes are deducted.
Do I Have to Spend It?
Yes! Unlike an LSA, FSAs must be fully used by the end of either the calendar year or benefit year (depending on what your employer uses). Any money not used by this deadline will disappear from the account.
Some employers offer slight grace periods or fractional rollover of funds not used, but they are under no obligation to do so.
Why is it called Employer-Sponsored if it is my Money?
FSAs are considered employer-sponsored since you can only enroll in an FSA through your employer. No other financial institution or organization is allowed to sponsor or open an FSA account on your behalf. Essentially, the IRS is putting the regulatory burden on your employer to follow all the compliance requirements.