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Flexible Spending Accounts

Flexible spending accounts (FSAs) are commonly used to supplement traditional health insurance—not replace it. FSAs typically are funded by the employee from pre-tax dollars and are used to pay for qualified medical expenses. Unlike health savings accounts (HSAs) and health reimbursement arrangements (HRAs), FSAs expire at the end of the year and any unspent funds revert to the employer.

What FSAs Offer Employers

  • Companies of any size can offer FSAs to employees.
  • FSAs can be used with traditional health insurance or high-deductible health plans (HDHPs).
  • Provided the money is spent on qualified medical expenses (defined in section 213(d) of the Internal Revenue Code), the employer benefits from federal and state income tax savings and payroll tax savings (FICA).
  • Companies can set the contribution limit to a FSA.

After an employee has designated a contribution amount for the year, that amount must be made available to the employee at the start of the year. Although unspent balances are generally forfeited at termination, if an employee leaves mid-year and has already spent the entire account, the employer is liable for balance.

What FSAs Offer Employees

FSAs provide employees with the chance to lower their taxable income by setting aside money from pre-tax dollars to pay for out-of-pocket medical expenses such as co-payments, prescriptions, and deductibles. However, because FSAs work on a "use it or lose it" basis—meaning that unspent funds at the end of the year are returned to the employer—employees should to estimate their eligible expenses carefully.

Do you want to estimate your pre-tax savings by participating in your company’s FSA health benefit? Use one of the many free online calculators available on various Web sites to help you.*

*The Alabama Department of Public Health provides this link as a resource only; it does not constitute an endorsement for any company offering any product

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