Flexible Spending Accounts (FSA)

Flexible Spending Accounts are a type of "cafeteria plan," commonly used among smaller employers. Participating employees generally elect to have their salary reduced each month. The employer then uses these funds to pay for certain benefits with "before-tax" dollars. The most typical benefits include the following:

1. Health Insurance Premiums
2. Medical expenses not otherwise covered
3. Dependent care expenses

Tax Benefits

The payment of the benefit is tax deductible for the employer and is not considered additional income to the employee.

FSAs Which Include Health Benefits

If an FSA provides health benefits (like medical or dental expenses) to participants, it must be ready to pay the full year's benefits to an employee who qualifies for the benefit.

For example, if the employee has contributed for only one or two months at the time of the claim, the employer must pay for the entire expense up to the amount projected for the full year of contributions by the employee.

If the employee then terminates employment before the amounts are deducted from his or her paycheck, the employer must suffer the loss.

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