A Flexible Spending Account (FSA) - also commonly referred to as an FSA, a Flex Plan or a Cafeteria Plan - is an employee benefits plan regulated by Section 125 of the Internal Revenue Code. FSAs allow employees to have money withheld from their paychecks on a pretax basis, and use this money for qualified medical or dependent care expenses.

Using an FSA, employees and employers can shield thousands of dollars of expenses annually, resulting in substantial tax savings. FSA contributions are sheltered from FICA, Medicare, federal income and unemployment taxes, as well as state income and unemployment taxes. By reducing their taxable income, participating employees increase their level of "take-home" pay.

An employee that is paying $5,000 per year for child day care can easily save over $1500 per year in taxes, and the company will save over $380 on that employee alone.

The amounts withheld from participants' paychecks are deposited into a dedicated checking account. Amounts must be tracked carefully, as each participant is entitled to expense reimbursements equal to the amount being withheld. As expenses are incurred, the participant pays for them out of his/her pocket, submits proof of the expense, and is then reimbursed from the FSA checking account.

FSAs are tracked in 12-month periods called Plan Years. Participants define the amount they want to contribute during the Plan Year. The elected amount is withheld equally from each paycheck during the year. This amount can only be changed in the event of a "Change in Family Status"; a closely defined event including:

• Change in marital status
• Birth/adoption of a child
• Death of a dependent
• Change in work status (to/from full-time or part-time)

Expenses for the full amount withheld must be incurred during the Plan Year. Expenses incurred during the Plan Year can be submitted during a grace period (usually 90 days) after the end of the year, but expenses incurred outside a Plan Year are not eligible.

Any money not claimed by the employee during a Plan Year becomes forfeit. This unclaimed money at the end of the grace period can be used:

• To defray plan administrative costs
• For other employee benefits
• As equally distributed refunds to all participating employees

Below are a few example expenses, at their average cost, that employees may have. A total estimated cost is listed. Assuming the medical FSA is elected in this amount, both the employer and the employee can realize savings.*