A recent trend in the small employer health benefit area is the growing popularity of flexible spending accounts. FSAs, also called flexible spending arrangements, allow employers and employees to use pretax dollars to pay for certain personal expenses that aren't otherwise covered by insurance.

There are two types of FSAs: health care FSAs and dependent care FSAs. As the names imply, the former is for reimbursing health care expenses, including any insurance deductibles and copayments, and the latter is for reimbursing dependent care expenses, such as daycare or sitter fees.

In an FSA, employees agree to payroll deductions to put pre-tax dollars into an account and then use the funds during the year for reimbursement of certain types of expenses. At present, they are permitted under federal law, so they qualify for federal income, Social Security, and Medicaid tax breaks, plus state income tax breaks in many states.

 

Your employee, Gussie Finknottle, who earns $20,000 in salary, elects to place $3,000 in a flexible spending account. Income tax, FICA taxes, and FUTA taxes will be paid only on $17,000. The $3,000 in the FSA is not subject to the taxes.

For more information, check out the following:

• basic rules
• reimbursable and nonreimbursable expenses