Using Your Flexible Spending Account

Employee benefits cannot only provide much-needed services to you and your family, but can also help to significantly reduce your tax bill. One of the most popular benefits provided in the workplace is a flexible spending account (FSA), which is an excellent means of diminishing the amount of tax you have to pay without illegal withholding of unpaid tax.

Typically companies will offer one of two types of flexible spending accounts: a dependent-care FSA, or a medical FSA. While a dependent-care FSA allocates money specifically for hiring care while parents work, a medical FSA is more general. The more common of the two, medical FSAs contain money allocated for all kinds of medical expenses, including over-the-counter drug purchases and insurance copays.

In both cases, money is withdrawn pre-tax from the worker’s income and deposited in the account. This carries several benefits, most notably the exclusion of deposited funds from employment and federal income taxes. Any contributions made by the employer can also be excluded from the worker’s gross taxable income. In addition, withdrawals may be tax-free if you use them to pay for qualified medical expenses. Those expenses that would qualify are specified in IRS Publication 502, Medical and Dental Expenses. However, if you are unsure, consult with your employer, human resources representative, or a qualified tax attorney to be certain.

Use It or Lose It

The one major drawback to these kind of accounts is their “use it or lose it” policy, in which workers must use all the money they put into the account, or face losing the money at the end of the company’s benefit year. The end of the year is usually December 31, though not always. Participants in such policies should always check with their employer to ensure they know the actual date by which they must use all their deposited funds.