A health care flexible spending arrangement — or health care FSA, sometimes referred to as a flexible spending account — allows employees to use tax-free funds to pay for some or all of their out-of-pocket medical expenses.
The money that employees elect to contribute to their FSAs is payroll deducted throughout the year, and employers can choose to match employee contributions. The money is available to employees in full as of the first day of the plan year, so they don’t have to worry about building up their funds before being able to obtain needed medical care.
Although FSAs make it easier for employees to afford medical care, employers retain significant control over their employees’ FSAs. The IRS limits the amount employees can contribute to an FSA, but employers can set lower limits. Employers can also decide whether to match employee contributions, and whether to allow employees an option to access FSA funds after the end of the plan year. Money remaining in the account stays with the employer at the end of the year (unless the employer chooses to offer a grace period or carryover option), or if the employee leaves the job. Employers also save money in payroll taxes when employees opt to defer part of their wages into an FSA.