What is a Flexible Spending Account

A flexible spending account is extremely useful in the united states. It is a form of account that helps an employee save taxes and take advantage of the account. Certain expenses of the account holder can be paid through this account without being taxed for. The taxes that come under the cafeteria plan will only qualify to be tax free under this account. This account is opened by the employer for his employees. The employees can save a part of their regular income in this account and use the amount for paying these qualified expenses.

The most commonly used expenses that are paid out of the flexible spending account are medical expenses and dependant care expenses. These are different from the other health benefits that the employees get in terms of the debit card that the account holder gets on this type of account. This card is called the FSA debit card or the flexcard.

The payment made in the account by the employer out of his regular earnings is done before the payroll taxes are shown annually. This enables the employee to show his income lower by the amount he has deposited in his flexible savings account. In this way the tax liability of the account holder will go down.

There are various advantages and disadvantages associated with the flexible spending account. The main advantage as discussed already is about the tax benefit that the holder gets. Another point to be noticed here is that once the employee leaves his employer he does not need to continue to pay into the same account. The money can simply be used by the employee as tax free money. The employer also looses nothing in this case. It helps the employee to be prepared for any unforeseen expenses that he might have to occur.

The usage of the debit card will ensure that the person is not using his money in this account for any other purpose besides what it is qualified for. The debit card is the only way by which the withdrawals can be made. The biggest disadvantage of a flexible spending account is related to its coverage period. The coverage period of a flexible spending account is either one year or the period when the coverage ends. The coverage can end when the employee leaves his current job or the current employer.

The biggest disadvantage with this is that if the account coverage is for one year and within that year the account holder does not utilize the money, he simply looses that money. Even if a part of the amount is unused it can be forfeited.