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How FSAs Work

A Flexible Spending Account (FSA), commonly called a flex plan or just FSA, is an employee benefit plan that is regulated by Section 125 of the IRS code. Plan participants contribute to a flex plan through payroll deduction. The contributions of the employees are made on a pre-tax basis, thus lowering the gross wages of those participants. This pre-tax process reduces the tax liability of the employee and FICA taxes paid by the employer.

The participant contributions remain on deposit for future reimbursements. The contributions may only be used for qualified plan expenses, which are outlined in Section 213(d) of the IRS code. FSA plans operate on a reimbursement basis.  

Flex plans operate on a "plan year" basis. Once per year, participants elect an annual amount to be payroll deducted up to a maximum specified by the employer. These elections are irrevocable and cannot be altered except in circumstances in which the participant experiences a change of family status, i.e. divorce, birth of child, loss of coverage, etc.

In order for the expense to be reimbursed, it must be incurred during the plan year. Many employers specify a "run-out" period for participants to file claims after the end of the plan year. Any participant contributions that remain on deposit at the end of the grace period are forfeited back to the employer. 

Example of Potential Savings:

Medical Expense	Annual Cost
Dental Cleanings	$150.00
Doctor's Office Visits	$ 60.00
Rx Cost	$120.00
Eye Care	$150.00
Total Annual Cost	$480
Estimated Tax Savings for Employee (based on 28% Federal, 6.2% FICA, 1.45 Medicare and 5.75 State.)	$198.72
FICA/Medicare Savings for Company	$ 36.72

Dependent Child Care Expense	Annual Cost
50 weeks of Day Care at $80 per week	$4000.00
Estimated Tax Savings for Employee (based on 28% Federal, 6.2% FICA, 1.45 Medicare and 5.75 State.)	$1,656.00
FICA/Medicare Savings for Company	$ 360.00