NCPA - National Center for Policy Analysis

What Is A Health Care Flexible Spending Account?

December 1, 2000

Many companies are in the season of offering choices of health-care insurance to their employees. Some analysts suggest that workers consider the advantages of flexible spending accounts. But there are some hitches to be aware of.

What are they and how do they work?

  • Employees contribute a certain amount out of their paychecks to their account -- usually up to $5,000 a year.
  • The sum isn't taxed, and is exempt from Social Security and most state taxes.
  • When the employee is billed for a qualified expense not covered by his health-insurance plan, he submits a receipt to the administrator of his FSA and is reimbursed.
  • Any money remaining in the FSA at the end of the plan's calendar year goes back to the company -- a major drawback.

The plan works best when employees can estimate the cost of upcoming health-care expenses and tailor their contribution accordingly. Those who haven't a clue should avoid the accounts.

Perhaps that's the reason that although more than 90 percent of employers offer the plans, only 13 percent of employees enroll in them.

Source: Sandra Block, "How to Pay Medical Bills and Save Taxes," USA Today, December 1, 2000.


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