A Flexible Spending Account is a spending arrangement set up by an employer in the United States of America for it’s employees. Under this arrangement, certain expenses that the employee incurs in his day-to-day life are paid for through this account.
The expenses cleared by this account may vary, and include things like medical expenses, and costs incurred by looking after one’s dependents with one crucial qualification: this account or the money therein is not subject to US federal and other standard payroll taxes.
To put it plainly, a Flexible Spending Account helps an employee do the following: pay for expenses which are deemed eligible to be a part of expenditure from this account with pre-tax dollars and lower the tax burden incurred by the employee.
The catch here is that the expenditure on which this account is used is carefully qualified, and apart from medical expenses and care for dependents, is limited to costs incurred transiting to the work place or securing vehicle parking when reporting to the work place.
Using a Flexible Spending account is in effect another way of getting a discount on expenses that one is going to incur anyway.
An employee can use a Flexible Spending Account already provided by the employer or choose to acquire ont eof their own through another provider.
Once the employee has decided on a provider, he or she estimates what percentage of his monthly income will be required to cover the expenses that are considered eligible. This portion is deducted from the employees salary before federal taxes like income tax and other taxes like Social Security tax and state taxes are effected on his or her remuneration.
This account also offers an important reimbursement opportunity. If an employee has already made payments on costs deemed eligible to be part of the Flexible Spending Account targeted expenses without using the account, he or she can be reimbursement upon presenting a claim to that effect.
Flexible Spending Accounts also work in tangent with debit card systems so that all these interactions can be controlled and inter-managed conveniently.
One important aspect of Flexible Spending Accounts needs to be remembered when managing such an account: all the money deducted from the employee’s monthly remuneration and diverted to this account must be used within that fiscal year. No carry-over to the next fiscal year is permitted. Any monies left-over are lost to the provider.
This implies that the employee needs to manage carefully the estimates that he or she will need in terms of percentage remissions to this account.
This minor potential obstacle is certainly easily offset by the definite advantages of savings incurred as well as increased disposable income that a user of Flexible Spending Accounts enjoys.
As such, a Flexible Spending Account is an important part and parcel of any individual’s personal financial planning.