Flexible Spending Account

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Definition: Flexible Spending Account


Flexible Spending Account

Quick Summary of Flexible Spending Account


A benefit offered to an employee by an employer which allows a fixed amount of pre-tax wages to be set aside for qualified expenses. Qualified expenses may include child care or uncovered medical expenses. The amount set aside must be determined in advance and employees lose any unused dollars in the account at year-end.




Full Definition of Flexible Spending Account


A flexible spending account is a monetary employee benefit that may be offered by an employer for a specific purpose. Flexible spending account dollars are in essence a portion of pre-tax employee compensation that can be set aside for eligible use. In order to qualify for a tax-free flexible spending account, an employee must meet certain qualifications, such as uncovered medical care or child care expenses, as well as expenses associated with eldercare. The terms of a flexible spending account, including a withheld dollar amount, must be predetermined. A flexible spending account bears many similarities to health savings accounts (HSAs). Though, unlike an HSA, a flexible spending account is somewhat more limited. Another practical disadvantage of a flexible spending account is that the term of a flexible spending account is limited to one year, and any unused money is thus squandered at the end of the term. A flexible spending account is a good option for those who have fixed medical expenses and lack health coverage.

As part of their employee benefits package, some employers provide flexible spending accounts (FSA), also known as cafeteria plans. You contribute a percentage of your pretax salary, up to the maximum allowed by your plan, which you can use to pay for qualifying expenses. Medical costs not covered by your health insurance, childcare, care for your elderly or disabled dependents, and life insurance are all examples of qualifying expenses. Because the amount you contribute to the plan is not reported to the IRS as income, your taxable income is reduced. When you arrange to have amounts deducted from your paycheck, you must, however, make an accurate estimate of how much you will spend during the year. Once you’ve decided how much you’ll contribute to an FSA for the year, you can’t change your mind unless you have a qualifying event, such as marriage or divorce. If you do not spend all of the money you set aside within the year – or, in some plans, within the year plus a two-and-a-half-month extension – you forfeit any remaining funds in your account. Some plans require you to pay for qualifying expenses and then be reimbursed when you file a claim. In other plans, you pay expenses directly from your account using a debit card linked to your account.


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Definition Sources


Definitions for Flexible Spending Account are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 5th April, 2022 | 0 Views.