The Flexible Spending Account (FSA)
Flexible Spending Accounts (FSAs) allow consumers to contribute money on a
tax-free basis for common out of - pocket healthcare expenses. Companies
often offer two types of spending accounts. The most popular is a medical FSA,
where a worker sets aside money to pay items such as health insurance copays,
uninsured treatments (for example, vision care) or even over the - counter
drug purchases. (Sorry, purely cosmetic surgery doesn't count.) Some companies
also offer their employees a separate dependent care account to cover the costs
of hiring someone to look after a child or other person who needs supervision
while the employee is at work.
The money usually is taken out through regular, equal payroll deductions. And
in both cases, the FSA deductions come out of a worker's paycheck on a pretax
basis. Because taxes aren't calculated on the contributions, the actual bite to
the paycheck will be less than the amount set aside. For example, a $100 per
pay -period contribution might reduce a paycheck by only $75 because a smaller
amount of taxes is withheld.
As helpful as these accounts are, they have one big drawback: the use - it - or
lose - it requirement that costs workers millions of dollars each year.
Previously, workers had to spend FSA contributions by the end of the company's
benefit year, which in most cases is Dec. 31. Any leftover account amounts were
forfeited. However, on May 18, 2005 the Internal Revenue Service loosened the
use it or lose - it constraint by announcing that it will allow spending
plan participants to make claims against their accounts for up to two months
and 15 days after the end of their benefit year. That means employees on a
calendar benefit year now can use their 2005 FSA contributions for expenses
incurred as late as March 15, 2006.
Learn about:
The Health Reimbursement Account (HRA)
The Health Savings Account (HSA)
The Section 125 Plan
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