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What is a Flexible Spending Account (FSA) and how does it Work?

Home » Insurance » Flexible Spending Accounts » What is a Flexible Spending Account (FSA) and how does it Work?

If you have heard of a FSA but not sure what it is, a FSA is a flexible spending account. It is one type of cafeteria plan that was developed and authorized under Section 125 of the Internal Revenue Code. FSA allows employees to purchase certain benefits that they may normally get, but as a pre-tax basis. For more information about cafeteria plans you can go here: http://www.afscme.org/wrkplace/cafe.htm. Having an FSA can give you many benefits you normally would not get.

How does an FSA work? FSAs in three different ways. These ways include:

• Voluntary participation: Once a year employees can sign up for a FSA and have a certain amount of funds deducted from their gross pay. Once this plan is initiated, a certain prescribed amount will be taken out of the employee's paycheck each pay period.
• Employer's obligation: When the employee signs up for the plan, the employer must compensate the employee whenever a claim for reimbursement is initiated. An example of this would be if the employee was to designate $2000 per year (which equals about $167 a month), that employee would be able to get reimbursed up to $2000 in the first month the plan went into effect, if the employee has qualified reimbursable expenses.
• Salary reduction amount: As stated under voluntary participation, when the employee signs up, he/she will decide the amount he/she wants taken out of his paycheck for the health car benefit prior to the plan starting. If the employee decided to use the FSA plan only as a premium conversion plan, the deductions will be automatic. Once this plan goes into affect, it cannot be changed unless the employee has a change in family status.

Next Page: Advantages and Disadvantages of Using Flexible Spending Accounts

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