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FSA - Flexible Spending Accounts

Flexible Spending Accounts are one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care of other expenses. Money deducted from an employee's pay into an FSA is not subject to payroll taxes, resulting in a substantial payroll tax savings.

One major drawback is that the money must be spent within the "plan year" as defined by the cafeteria plan (commonly the calendar year), and any money that is left unspent at the end of the plan year is forfeited back to the company; this is commonly known as the "use it or lost it" rule. A second requirement is that all applications for refunds must be made by a date defined by the plan. If funds are forfeited, this does not eliminate the requirement to pay taxes on these funds if such taxes are required. For example, if a single person elects to withhold $5000 for child care expenses and gets married to a non-working spouse, the $5000 would become taxable. If this person did not submit claims by the required date, the $5000 would be forfeited, but the taxes would still be owed on the amount.

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