Flexible Spending Account (Insurance)
A Flexible Spending Account (FSA) is a tax-advantaged account that allows employees to set aside pre-tax dollars to pay for eligible medical, dental, vision, or dependent care expenses. The money is deducted from paychecks before taxes are calculated, reducing taxable income.
Example
“John contributed $2,000 to his FSA this year and used it to pay for his prescription medications and his daughter's orthodontic treatment.”
Memory Tip
FSA = 'First Save Taxes' - you save on taxes first, then spend on healthcare.
Why It Matters
FSAs can save individuals hundreds or thousands of dollars annually by reducing taxable income on money spent for healthcare expenses. For someone in a 22% tax bracket contributing $2,750 to an FSA, they save about $605 in taxes each year.
Common Misconception
Many people avoid FSAs thinking they'll lose unused money, but recent rule changes allow carrying over up to $610 annually or provide a 2.5-month grace period. The tax savings often outweigh the risk of losing small amounts of unused funds.
In Practice
Sarah earns $60,000 annually and contributes $2,750 to her medical FSA. This reduces her taxable income to $57,250, saving her approximately $688 in federal and state taxes (assuming a combined 25% tax rate). She uses the FSA funds for contacts, dental cleanings, copays, and over-the-counter medications throughout the year.
Etymology
Established by Section 125 of the Internal Revenue Code in 1978, these accounts were created to help employees pay for healthcare expenses with pre-tax dollars.
Common Misspellings
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Related Terms
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See Also
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