Flexible Spending Accounts allow employees to put money aside pre-tax to pay for certain eligible expenses as described by the Internal Revenue Code (IRC). Employees save on their Federal Income Tax, FICA Tax and State Taxes in most states. Employers save money on these plans as well because their FICA taxes are lowered. The employer typically saves enough to pay for the administration of the plan making this a no cost benefit to the employer.
There are two basic types of flexible spending account (FSA);
Health FSAs reimburse employees for eligible medical expenses that are not paid for by any other source. These expenses can be incurred by the participant, their spouse or their eligible IRC Section 152 Dependents. Eligible expenses include deductibles, co-pays, vision, dental and prescriptions as well as any other medically necessary items that are not covered by insurance.
Dependent Care FSAs reimburse employees for eligible dependent day care expenses. These expenses must be incurred to allow the employee and their spouse to be gainfully employed. Eligible expenses include a babysitter, daycare, afterschool programs and day camp. The expense must be incurred while the employee and their spouse are working. Dependent Care Reimbursement is only available for the care of Children under the age of 13 or a spouse or dependent who is physically or mentally incapable of self care.