Details about the healthcare Flexible Spending Account
A Flexible Spending Account (FSA) is a great way to help employees reduce their healthcare costs and make budgeting easier. You take money out of the employee's paycheck before taxes; then the employee draws on the funds during the plan year to pay for qualified expenses. Employees should make sure to set aside only as much as they’ll use – with an FSA, they typically can only use the money for expenses during the current plan year.You determine what types of expenses are qualified, within guidelines defined by the Internal Revenue Service (IRS). Most employers’ plans cover:
- Medical expenses like deductibles and copayments
- Out-of-pocket prescription costs
- Dental expenses
- Vision services
When employees have money in an FSA, they have peace of mind knowing they can cover healthcare expenses the plan doesn't cover. And budgeting is easier because they’re paying a little with each paycheck, instead of paying a lot of money at one time. Plus, employees have access to the full annual amount of their healthcare FSA election on the first day of the plan year.
You can also offer a separate FSA for qualified dependent care expenses, such as childcare or adult day care for a dependent that’s under the age of 13 or disabled. In many cases, employees can set up a healthcare account, a dependent care account, or both types, depending on their situation.
If you offer a Health Savings Account (HSA), HSA participants can have a "limited" FSA for vision, dental, and preventive care expenses.
Tax savings example
Last year, Laura made $28,000 and put $1,500 in her dependent care FSA. The example below shows how much she saved by using the pre-tax money for qualified dependent care expenses. Without an FSA, she would have paid for these expenses from her take-home pay, which she paid taxes on.
| Example of annual tax savings* | With FSA | Without FSA |
|---|---|---|
| Laura’s taxable income | $28,000 | $28,000 |
| Pre-tax money deposited into her FSA | -1,500 | -0 |
| Laura’s remaining taxable income | 26,500 | 28,000 |
| Minus federal and Social Security taxes | -9,447 | -9,982 |
| Take-home pay spent on qualified expenses | -0 | -1,500 |
| Laura’s remaining take-home pay | $17,053 | $16,518 |
Putting pre-tax money in a dependent care FSA saves Laura $535 on her federal tax bill – plus she’ll save on state taxes as well.
* This example is intended to demonstrate a typical tax savings based on 28 percent federal and 7.65 percent FICA taxes. Actual savings will vary based on the individual's tax situation.