What Is a Flexible Spending Account (FSA)?

An FSA, also known as a flexible spending account, is a type of work benefit that employers may offer their employees that allows them to set aside a certain amount of wages before taxes are taken out to pay for specific expenses. Whether an expense is eligible to be paid with money from an employee’s FSA will depend on their individual FSA plan. Briefly, an FSA plan sets out the rules for how to use the money held within an FSA.

Some common examples of FSA plans that an employee may be offered by an employer include:

• An FSA to pay for the costs of child care;
• An FSA to pay for healthcare expenses;
• An FSA to pay for costs associated with caring for dependents; and/or
• A cafeteria system, which lets employees select two or more work benefits that they would like to put their pre-taxed wages towards (e.g., medical expenses and child care costs).

In addition, the U.S. Internal Revenue Services (IRS) allows employers to make FSA employer contributions to their employees’ FSA plans. However, the IRS imposes annual restrictions on how much an employer can contribute towards an employee’s FSA. These restrictions not only fluctuate on a yearly basis, but also in accordance with the type of FSA that an employee receives.

For example, an employer can contribute up to $500 to an employee’s healthcare FSA, even if the employee themselves does not set aside any pre-taxed wages for it. On the other hand, an employer who wishes to contribute more than $500 to an employee’s health FSA, will only be allowed to match an employee’s contributions per dollar.

So, for instance, if an employee contributes $550 pre-taxed dollars to their health FSA, then that is the extent that their employer may contribute as well. Again, these cost limits may change depending on a number of factors, such as the tax year, the laws that govern FSAs, how much an employee contributes to their own FSA, the specific type of FSA plan that an employee has, and whether an employer elects to contribute any money towards an employee’s FSA.

To learn more about how FSA and FSA plans work, you should speak to a representative in your human resources department. You may also want to consult with a local workers compensation lawyer for valuable legal advice on FSAs and/or if you need help with resolving a dispute over the funds in your FSA or the terms of your FSA plan. 

How Does a Flexible Spending Account Work?

In general, an FSA account typically works as follows:

• As mentioned, an FSA account is a type of an employee benefit. Thus, an employer must first offer an employee the option of registering for an FSA account before they can get one. If FSAs are offered by an employer, an employee can enroll in an FSA plan during their employer’s open enrollment period.
• Next, the employee must determine how much they would like to contribute towards the FSA for the year. They can do this by creating a budget sheet and by making sure that they do not set aside more money than they can afford to contribute.
• The funds will be deducted from each paycheck that an employee receives before any taxes are taken out. As of 2021, the maximum amount that can be contributed to an FSA is $2,750.
• The money placed in an FSA account can then be used over the course of the designated plan year to pay for eligible items, such as approved medical expenses or child care costs. Any money that remains in an FSA account at the end of the year will be paid out to the employer. Therefore, it is very important for an employee to budget wisely and to select an amount to contribute to their FSA account that will not cause them to lose any money.

What Are the Advantages of Having a FSA?

As discussed above in the first section, an FSA permits an employee to put aside a set amount of pre-taxed wages from their paycheck in order to pay for certain types of approved expenses. This not only makes paying for those expenses much more affordable, but can also help an employee to save up to forty percent on eligible expenses like healthcare and child care.

This way, instead of using their income to pay full price for FSA-approved items, they can save money on both the price of the item as well as on how much they earn. For example, instead of paying for a vision procedure that is not normally covered by insurance, an employee may be able to use the money in their FSA to pay for it rather than having to pay for the cost of the vision procedure out of pocket.

Another advantage of having an FSA is that since an employee’s contributions are set aside before they are taxed, this can reduce the amount of taxable income that an employee earns. In addition, having less taxable income may serve to increase the total amount of disposable income that an employee earns per year.

One other important advantage that an employee can gain from having an FSA is that they will only need to pay a dollar towards an FSA in order to obtain any tax benefits. This can help an employee save money on and avoid FSA tax issues, such as:

• Federal income tax
• Social security tax; and/or
• Local and state income taxes.

Can Flexible Spending Accounts Be Changed?

As previously mentioned, FSAs can change on a yearly basis due to modifications imposed by tax laws or the IRS, such as the limit on an employer’s contribution towards an employee’s FSA. In other words, the terms of an employee’s FSA plan tend to change every year.

Thus, each FSA plan is generally treated as if it were a separate plan from the one used during the previous work year. As such, an employee must re-enroll in and make their selections for a new FSA plan each year.

By getting to choose a new FSA plan and possibly different benefits each year, this gives employees the opportunity to modify or change any expenses they no longer want covered and put it towards contributions for the expense that they do want covered. However, whether an employee can change an FSA may be contingent on the type of FSA plan they have and the amount of pre-taxed wages they have set aside for a particular FSA.

The one exception to modifying an FSA account is that an employee cannot change the amount of pre-taxed wages they elected to contribute when they enrolled in a plan for the year. This must stay the same until the current FSA plan year has ended.

Should I Consult with a Lawyer Regarding My FSA Enrollment?

The laws that regulate taxes and employee FSAs are often difficult to understand without the help of a legal professional. Therefore, it is strongly recommended that you obtain further legal guidance on issues concerning FSA plans from a workers compensation lawyer in your area who has experience in handling FSA related matters. Your lawyer will be able to explain any laws or procedural requirements for FSAs that may seem confusing to you.

Your lawyer will also be able to clarify how your particular FSA plan works. In addition, your lawyer can keep you abreast of any changes made to the tax law that may affect your FSA plan or how you fill out your income tax return for the year.

Finally, if you need help with enrolling in an FSA plan or want to know the risks and benefits associated with a particular FSA plan when compared to another, your lawyer will be able to provide legal advice on such FSA matters as well.