Short answer: A pre-tax account for eligible medical expenses.
Full answer: A health flexible spending account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax dollars to pay for eligible medical expenses not covered by insurance, such as co-pays, prescription drugs, medical supplies, and some over-the-counter items. Contributions are deducted from an employee’s paycheck before taxes, reducing taxable income and saving on federal and payroll taxes. For 2025, the maximum contribution limit is $3,200 per employee.
For example, an FSA might cover: “Co-pays for doctor visits, prescription medications, dental work, vision care, and certain medical equipment like crutches.” Typically, FSAs have a “use-it-or-lose-it” rule, meaning that any funds left unspent at the end of the plan year are forfeited unless the plan offers a grace period or a carryover option (up to $610 for the following year).
Key Benefits:
Legal Considerations: FSAs are regulated under Internal Revenue Code (IRC) Section 125 and are part of a Cafeteria Plan. Employers must comply with these rules to maintain the FSA's tax-advantaged status.
Warning: Avoid Common Mistakes: Ensure employees understand the “use-it-or-lose-it” rule and plan their contributions accordingly. Communicating clearly about eligible expenses and deadlines can help prevent fund forfeiture.
General federal norm: Internal Revenue Code (IRC) Section 125; IRS guidelines on FSAs
State: All States
Full answer: A health flexible spending account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax dollars to pay for eligible medical expenses not covered by insurance, such as co-pays, prescription drugs, medical supplies, and some over-the-counter items. Contributions are deducted from an employee’s paycheck before taxes, reducing taxable income and saving on federal and payroll taxes. For 2025, the maximum contribution limit is $3,200 per employee.
For example, an FSA might cover: “Co-pays for doctor visits, prescription medications, dental work, vision care, and certain medical equipment like crutches.” Typically, FSAs have a “use-it-or-lose-it” rule, meaning that any funds left unspent at the end of the plan year are forfeited unless the plan offers a grace period or a carryover option (up to $610 for the following year).
Key Benefits:
- Tax savings: Contributions are pre-tax, reducing taxable income.
- Immediate access: Employees can use the full elected amount at the start of the plan year.
- Eligible expenses: Covers a wide range of medical, dental, and vision expenses.
Legal Considerations: FSAs are regulated under Internal Revenue Code (IRC) Section 125 and are part of a Cafeteria Plan. Employers must comply with these rules to maintain the FSA's tax-advantaged status.
Warning: Avoid Common Mistakes: Ensure employees understand the “use-it-or-lose-it” rule and plan their contributions accordingly. Communicating clearly about eligible expenses and deadlines can help prevent fund forfeiture.
General federal norm: Internal Revenue Code (IRC) Section 125; IRS guidelines on FSAs
State: All States