Flexible Spending Account

Flexible Spending Account

An employee benefit in which an employee may contribute so much of his/her pretax income into a special account that may be used for a broad range of purposes. One may use the funds in a flexible spending account for matters such as uncovered medical expenses, life insurance premiums, or other things. Some flexible spending accounts expect the account holder to pay for these things out-of-pocket and then receive reimbursement. Others have a debit card attached to the account that the account holder may use. Flexible spending accounts are not taxed.

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Flexible spending account. Some employers offer flexible spending accounts (FSAs), sometimes called cafeteria plans, as part of their employee benefits package.

You contribute a percentage of your pretax salary, up to the limit your plan allows, which you can use to pay for qualifying expenses.

Qualifying expenses include medical costs that aren't covered by your health insurance, childcare, care for your elderly or disabled dependents, and life insurance.

The amount you put into the plan is not reported to the IRS as income, which means your taxable income is reduced.

However, you have to estimate correctly the amount you'll spend during the year when you arrange to have amounts deducted from your paycheck. Once you decide on the amount you are going to contribute to an FSA for a year, you cannot change it unless you have a qualifying event, such as marriage or divorce.

If you don't spend all that you had withheld within the year -- or in some plans within the year plus a two-and-one-half month extension -- you forfeit any amount that's left in your account.

In some plans you pay for the qualifying expenses and are reimbursed when you file a claim. In other plans, you use a debit card linked to your account to pay expenses directly from the account.

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Flexible Spending Account

A method of paying for benefits under a cafteria plan through salary reductions. Also see "Cafteria Plan."