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Why Should You Put Your Money In A Flexible Spending Account (FSA)? 


Do you know what is a Flexible Spending Account (FSA)? If not, this blog will help you understand everything you need to know about putting your money in a FSA. Keep reading to find out more.

Do you wish to reduce your taxable income? Do you pay for your healthcare expenses using your pre-tax money? If yes, a Flexible Spending Account (FSA) can be a perfect choice for you. Here is everything you need to know.

What Is a Flexible Spending Account? 

Flexible Spending Account

A Flexible Spending Account (also known as a Flexible Spending Arrangement) does not differ from your regular savings account that you have opened with any banking company. The only difference is that an FSA offers you tax advantages. 

Your employer usually creates these accounts in which you, your employer, or both need to make regular contributions. The advantage that an FSA offers is that it helps you to reduce your taxable income. 

You get a tax deduction from the contribution towards the FSA. It helps you to use pre-tax dollars to pay for specific expenses.  

You do not pay any taxes on the receiving amount from your employer in your FSA.  

What is the working of a Flexible Spending Account? 

How does FSA work? 

You can pay designated specific expenses from the amount accumulated in your FSA. The FSAs bases on “use it or lose it,” which means any unutilized amount may expire at the end of the plan year.  

However, your employer can allow you to carry forward up to a maximum of $500 in the subsequent years.  

Let us understand the working of an FSA through a practical example: 

Dalton is a regular employee of ABC Manufacturing Services, headquartered in Canada. He has elected to contribute $150 per month towards his FSA by payroll deduction.  

Dalton accumulates $1,800 in his FSA, available for usage on the first day of the plan year. If it is a Medical FSA, then Dalton can spend (or claim reimbursement later) the entire balance of $1,800 on qualified medical expenses.  

Source: Freepik

What are the different Flexible Spending Accounts? 

Types of FSA 

Typically, we can broadly divide Flexible Spending Accounts into 3 distinct categories: 

1. Health Flexible Spending Account (also known as Medical Flexible Spending Account) 

It is the most subscribed and popular type of FSA. If you have a Health FSA, then you can use your pre-tax dollars to pay for all your out of the pocket medical/ health care expenses, such as 

  • Payment of fees to doctors for getting prescribed 
  • Doctor co-payments 
  • Medical expenses related to dental care 
  • Medical expenditures because of defects in the vision and eye care 
  • Medical costs associated with ortho care and associated bone defects 
  • Costs incurred towards diagnostic tests and all the medical lab tests 
  • All the other qualified medical expenses 

If you do not have a health FSA, pay for all these medical expenses using your post-tax dollars, which would lay an additional tax burden on you.  

A health FSA covers your medical expenses. It also covers all the medical costs of your spouse, children, and all eligible dependents. 

2. Dependent Care Flexible Spending Account (also known as Child Care Flexible Spending Account) 

Second, on our list is a Dependent Care FSA. It allows you to pay for the expenses that are related to dependent care services, such as  

  • Preschool expenses of your kids 
  • Fees associated with summer day camps and all the other before or after-school programs 
  • Costs related to childcare or adult care 
  • All the other qualified dependent care expenses 

Like a health FSA, it allows you to pay for all expenses using pre-tax dollars. You can use your Dependent care FSA only if: 

Your child is under the age of 13:

You cannot pay for any dependent care services from your FSA account if your child is above 13 years of age.  

Your spouse or any of your relatives: 

  • Is mentally or physically incapable of performing their daily chores independently 


  • Such a person is living in your house 

3. Adoption Flexible Spending Account 

It is the least popular type of FSA, and only a few people know about it. However, it indeed exists. An adoption FSA allows you to pay for all your expenses incurred in adopting a child using your pre-tax money.  

What Are Some Common Characteristics of a Medical/ Health Flexible Spending Account? 

Here are some features or characteristics of a Medical FSA:

  • Your employer must establish a medical FSA.
  • Usually, your employer will add money/ contribute to your Medical FSA, but employee contributions are also allowed up to a specified limit.  
  • You make contributions to the FSA from your pre-tax income.
  • You cannot pay your health insurance premium from your Medical FSA.
  • The amount unused in a Medical FSA expires at the end of the year. It is subject to a maximum carry forward of $500 if approved by the employer.  

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