What is a flexible spending account (FSA)?

A flexible spending account (FSA) is indeed a pre-tax benefit account that allows employees to set aside money for eligible healthcare expenses. This arrangement is designed to help individuals manage their out-of-pocket healthcare costs by providing significant tax advantages. Employees can contribute a portion of their earnings to the FSA before taxes are deducted, which lowers their taxable income. This pre-tax contribution means that when funds are withdrawn from the account for eligible expenses, such as copayments, deductibles, or certain medical supplies, the individual does not pay income tax on those funds.

Using an FSA can effectively increase disposable income since the amount contributed is not subject to income or payroll taxes. The funds contributed to an FSA generally must be used by the end of the plan year, although some plans may offer a grace period or allow a small amount of funds to be carried over into the next year. This account is particularly beneficial for those who have well-defined healthcare needs, as it allows them to budget effectively for these anticipated expenses while enjoying tax savings.