If you spend money on out-of-pocket medical expenses, dependent care, parking or public transportation to and from work, a flexible spending account is for you.
A flexible spending account or FSA can make these expenses more affordable by allowing you to pay for these with pre-tax dollars. This is made possible through your employer participating in a flexible benefits plan which is qualified under codes section 125 and 132 of the Internal Revenue Service.
You are allowed to participate in any or all of the three different FSA plans depending on your personal needs and which of the three your employer sponsors. You would elect to have a specific amount of your pre-tax income deducted from your paycheck each pay period. This money is not included in your gross earnings or taxable income. You can then use these pre-tax dollars to pay for eligible expenses, either medical, dependent care or parking/transit based on which of the three, separate accounts you participate in. By contributing pre-tax dollars to an FSA plan, you lower your taxable income, thereby paying less in taxes and increasing your take home pay.
The maximum you can contribute to a medical FSA is determined by your employer, although the IRS allows up to $5,000 annually for dependent care. Dependent care includes daycare for a child(ren) 13 or under or an adult as long as the care is necessary in order for you and your spouse to be employed. Eligible medical expenses would include co-pays, deductibles, orthodontia, eyeglasses, contacts, over the counter drugs and much more.
It is important to note that when planning your FSA allotment, one should not over estimate their expenses as FSA plans are “use it or lose it.” You must use all the money you commit to the account or you will not receive a refund of what is left in the account following the plan year. You end up saving 20-32% or more on your out-of-pocket costs for eligible expenses!