Flexible spending arrangements

Flexible Spending Arrangements (FSAs) are accounts which are setup by an employer of an organization to hold pre-tax money assigned by the employees for their medical expenses and health care. Also known as Flexible Spending Account, FSAs help both employees and employers to save considerable amount of money. Flexible spending accounts, also known as “cafeteria plans” or “125 plans,” are allowed under section 125 of the Internal Revenue Code (IRC). Flexible Spending Arrangements is same to a Health Savings Account, which is provided for self-employed individuals and some small businesses.

Flexible Spending Arrangements allow the employees to decide how much money they would like to spend on uninsured health care expense for the upcoming year and then designates the desired amount to be deducted before taxes from his/her payroll. This designated amount is placed in the Flexible Spending Account and then the employee can submit insurance statements and receipts during the year to be reimbursed.

There are mainly two kinds of Flexible Spending Arrangements:

  1. Health Care FSAs
  2. Dependent Care FSAs

Health care FSAs is for the reimbursing of health care expenses. This also includes any co-payments as well as insurance deductibles. Dependent care FSAs are meant for the reimbursing of dependent care expenses including sitter fees or daycare. Both health care FSAs as well as dependent care FSAs permit a maximum annual deferral amount of $5,000 for a family.

There is no limit on how much money an employee has to contribute to his/her Flexible Spending Arrangements. However, there are some companies which even set such a limit of $2000 to $3000 on the FSAs. If you have contributed the amount during the open enrollment period which occurs once every year, then the employee is not allowed to make any changes in the amount he/she has once set. But there is an exception that they can drop out the plan or change the contribution amount if there is any change in his/her family status, such as death of a partner or birth of a child.

The law mandates the employee to forfeit any unspent money in the flexible spending arrangements at the end of the year. Therefore don’t forget to make all the claims for reimbursement in the same year itself, else it will be lost. Hence before fixing any specific amount to your flexible spending arrangements make a thorough research of how much medical expenses you met in the last year. This helps you to get a clear picture of how much money you need at an average for paying your medical bills so that you can contribute the amount in your account correctly.