When you create an FSA, you choose to have a specific amount of your annual salary withheld from your paycheck and deposited to your FSA. These withholdings are on a pre-tax basis.
Flexible Spending Accounts (FSA’s) are benefit options designed to increase your disposable income by reducing the amount of taxes you pay. An FSA enables you to use pretax dollars to pay for qualified health care expenses which are not reimbursed under any health care plan or insurance plan, while a Dependent Care FSA pays for your qualified dependent/child care expenses. However, FSA funds are not interchangeable.
Flexible spending accounts offer significant tax advantages. Employees do not pay federal income, state income, or FICA taxes on the salary they contribute to a FSA plan. Employers, in turn, do not pay matching FICA (7.65%) and FUTA taxes because employees’ gross incomes are significantly reduced.
A health care FSA, which allows employees to pay co-payments and deductibles with tax-free dollars, can go a long way to helping employees shoulder their share of the burden. FSAs are excellent tools for employees in savings significant tax dollars especially in this day of rising health care costs.