How Flexible Spending Accounts Work
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
Expense and Savings Example
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.*
* The
average contribution is $908 per the Journal of Health
Economics.