How do flexible spending accounts (FSA) work?

Flexible spending accounts (FSA), or flexible spending arrangements, can save you money while helping to ensure you have funds available when you need them to pay for medical expenses (if you have a health FSA) not covered by your health insurance plan, or childcare or adult-care services for your dependents (if you have a dependent care FSA).  Most FSAs work as follows.

1. Your employer offers you a dependent care FSA and/or health FSA and you fill out the forms to enroll in it. The forms will require you to estimate the cost of your expenses for the year.
2. Based on those costs, your employer will set up an automatic deposit system for the year. Your annual cost will be divided by the number of paychecks you will receive that year and that amount will be withdrawn from each paycheck before that money is subjected to taxes and deposited automatically into your FSA. For a health FSA you can contribute up to $2,550 per year, in accordance with laws established by the Internal Revenue Service (IRS).
3. As you incur FSA-eligible expenses throughout the year, you can use the funds in your FSA to pay for them tax-free, saving money.
4. The IRS has a use-it-or-lose-it provision that requires employees use up or forfeit their FSA funds by the end of their plan year. Some employers offer a grace period beyond the plan year (no more than 2 1/2 months) or allow employees to carry over part of their FSA funds to the next year (no more than $500).

Before enrolling in your employer's FSA plan, read the plan documents carefully to be sure the expenses you anticipate are eligible for payment with your FSA funds.