What You Need to Know About Flexible Spending Accounts

A flexible spending account (FSA) is a common benefit offered by employers. Flexible spending accounts provide tax advantages and can help you pay for expenses not covered by your insurance, such as deductibles, co-pays, and prescription drugs.

A flexible spending account is offered through employer-created cafeteria plans. You are allowed to deposit money into the account. The funds are deducted from each paycheck. You can decide to set a certain amount of money aside each week. The Internal Revenue Service dictates the maximum. For 2013, the maximum on a medical FSA will be $2,500. So, if you were paid weekly, you could set aside a maximum of $48 per week for 52 weeks. The money is taken out before taxes so that you are not subject to tax on any money you put in the FSA account. The FSA funds can then be used to pay for qualifying health expenses, and in some cases, dependent care.

Qualifying Expenses

A flexible spending account is designed to be used for qualifying health expenses. This may include medical bills, dental care, or prescription drugs. It does not include food, clothing, and other non-medical related expenses. At one point, you could be reimbursed for over-the counter medication, but that is no longer the case. The Patient Protection and Affordable Care Act dictates that all drugs must be prescribed to be reimbursable with an FSA. There is an exception to qualifying expenses, and that is dependent care. Some FSAs (although not all) allow reimbursement for dependent care. This may include child care or care of another dependent, such as an adult who cannot care for themselves.


It is important to note that a flexible spending account does not work like a traditional insurance policy. There is no insurance company to bill. Instead, you pay the expense out of pocket and then make a claim to receive reimbursement. There are some employers that will issue a debit card with the FSA, allowing you to use the debit card to pay for things at the point of sale, rather than waiting for reimbursement. However, receipts must be kept, and you must shop at a pharmacy, grocery store, or another establishment that accepts the card.

Pros and Cons

As with every type of insurance or financial account, there are pros and cons associated with flexible spending accounts. The biggest advantage is the ability to save money tax free to pay for medical expenses. The biggest disadvantage is that you cannot continue the flexible spending plan if you lose your job. You may have to forfeit any money put into the account, and the employer is not required to offer you any sort of reimbursement. Another drawback is that you must use the money each year. Your FSA funds do not roll over from year to year. You generally have 15 months to use the funds after your initial deposit. If you do not use it, you lose it.


A flexible spending account could be considered a form of health insurance in the same way that a health savings account (HSA) is considered a form of health insurance. It is funded by an individual and has tax advantages. The difference is that flexible spending accounts are commonly offered in conjunction with traditional health insurance plans, while HSAs are usually associated with high deductible health insurance plans.

Guest post from Nicky Shaw. Nicky writes for HomeSecurity.org.