A flexible spending account or (FSA) will allow you to set aside pre-tax dollars in an account you can use for qualified medical expenditures and/or dependent care expenses. The IRS, in Publication 502, defines qualified medical expenses. A list of qualified medical expense may be found at the following link.
This plan may also be referred to as a section 125 plan or cafeteria plan. With an FSA you can save about 30% on your out-of-pocket medical, dental, and dependent care expenses.
By setting aside pre-tax money for medical or dependent care expenses throughout the year you:
The money you set aside for your FSA is automatically deducted from your salary on a pre-tax basis and deposited into your designated FSA before federal, state (if applicable) and FICA taxes are withheld. You can choose to set aside money for medical expenses, dependent care expenses, or both.
Your FSA enables you to be reimbursed with pre-tax dollars for childcare payments made to someone other than your spouse or one of your dependents. Contact your employer for additional details.
You should carefully estimate your expected out-of-pocket medical and/or dependent care expenses. In order to qualify for reimbursement, eligible expenses must be incurred during the plan year, regardless of when you’re billed or pay for the expense.
By law, any amount in your account not claimed during the plan year or grace period will be forfeited back to your employer.