We are all looking for ways to save money, and in that endeavor there is one financial tool that has become very popular. Known as a flexible savings account, or FSA, they are an easy way to help set aside funds that can be used to cover certain expenses that might be incurred.
In these programs, an employer will take money out of an individual’s paycheck and place it in a separate account. It is a financial account that offers certain tax advantages, the most common of which is having the deposited amounts tax deferred. Another advantage of them is that they are not subject to payroll taxes. This also works to increase the donated amount.
These plans are also known as flexible spending arrangements, with the most common type being a medical FSA. These are used strictly in instances when an individual incurs medical expenses above and beyond what their insurance plan will cover. Some of the most common needs for these accounts are for deductibles, co-pays, and charges such as out-of-network billing.
The great benefit of the FSA is that the money can be taken out before the worker sees or misses it. But the money does not have to be used at that moment. Generally, it is placed into the account and builds until such a time as expenses become too much and the individual needs assistance paying them. At that point, the account can be accessed and the funds used in the appropriate way.
When utilized as a medical FSA, the money is meant to only be used for their specified purpose. However, monitoring this is quite difficult. Often, individuals will have these accounts established and, later in the allotment period, they may find themselves in a bind financially.
There are certain methods used to withdraw funds from these accounts. The owner can either go with a paper transfer, but more than likely everything will be handled with a FSA debit card. It is much easier to use and simplifies the bookkeeping process for the employer.
FSA funds are started over at the beginning of the annual cycle, which is determined by the employer. Employers do take a risk in establishing these plans for employees since the maximum allowed amount of the fund might be accessed at the beginning of the cycle, regardless if the entire amount has been set aside or not. For example, if the account is set to have a balance of $2,000 by the end of the 12-month cycle, the employee may access the entire $2,000 the first month of the cycle, even though it has not been deposited. If the employee leaves before the money can be repaid, the employer loses out on the difference.