What is a Flexible Spending Account?
A flexible spending account (FSA) is a bank account that’s specifically dedicated to medical expenses. Like traditional bank accounts, it’s set up through a financial institution, and deposits are made into the account. Withdrawals can also be made from the account’s balance at any time — but they must be used for approved medical expenses.
When an FSA is used to pay for approved medical expenses, the account provides tax benefits that other types of accounts don’t. The money deposited into an FSA is pre-tax income, meaning the account holder doesn’t have to pay taxes on that portion of their income. As long as the money is used for approved expenses, it’s also not taxed when withdrawals are made.
Sometimes FSAs are also referred to as health FSAs, because “FSA” is an acronym for other terms, such as the USDA Farm Service Agency and federal student aid.
How Much Can Be Deposited into an FSA?
At the time of writing, the Affordable Care Act’s limit for employee contributions made to an FSA was $2,600 in a plan year. Some plans, however, have lower limits. Because healthcare and tax laws can change every year, it’s best to ask a financial advisor what the annual limit is currently.