Flexible Spending Account Information

A flexible spending account (FSA) is an account in which people can save money to pay qualifying health care expenses. With many employers cutting back on heath insurance or asking workers to pay more of the costs, flexible spending accounts are one way for people to reduce their health care costs. Not only can flexible spending accounts help people save money on doctor visits and prescriptions, but the money also typically can be used for over-the-counter pain relievers and first aid items as well.

Flexible Spending Account Basics

• Flexible spending accounts are generally employer-sponsored plans. Employers do not contribute to the plans, but rather allow employees to contribute part of their pay into the accounts. During open enrollment, employees can open a flexible spending account and determine how much money to contribute to the account. While the IRS allows people to use money from a flexible spending account for many health expenses, the employer's rules may be stricter. People should make certain to understand what the plan allows and does not allow; employers will provide a list of approved expenses.

Flexible Spending Account Advantages

• Flexible spending account contributions are pre-tax, meaning that the money is not subject to income taxes. This gives people more money to cover these expenses. People can use money from a flexible spending account to pay for expenses not covered by health insurance. A flexible spending account also creates forced savings. Consumers who have difficultly saving money for medical expenses can use these accounts to make certain that the money will be available when needed.

Flexible Spending Account Disadvantages

• The primary disadvantage of the flexible spending account is that the money in the account is "use it or lose it." Workers lose money left unspent in the account after the end of the year (some employers extend this deadline to the middle of March). Another disadvantage is that money placed into the flexible spending account reduces the worker's Social Security income, which will reduce the amount of Social Security he can receive at retirement. The difference should not be significant for most people.

Dependent Care Accounts

• A variety of the flexible spending account is the dependent care account. A dependent care account is similar to a flexible spending account. However, the dependent care account allows workers to save money for use providing care for children, elderly parents or others who are dependents for tax purposes. Money from the account can be used for day care, home health aides and other expenses related to providing care for a dependent. Dependent care accounts have different rules from flexible spending accounts.