What Is a Flexible Spending Account (FSA)?

The U.S. Internal Revenue Service (IRS) allows flexible spending account (FSA) funds to be used for qualified medical expenses incurred by an account owner and their spouse. Additionally, the IRS allows FSA funds to be used by any person claimed as a dependent on the FSA owner's tax return, with certain qualifications.

Key Takeaways

  • An FSA is a tax-free account that is available to salaried employees. Contributions to an FSA account have an annual limit, which is adjusted for changes in the cost of living by the IRS every year.
  • Contributions are exempt from federal income tax, federal unemployment tax, Social Security, and Medicare taxes.
  • In addition to the FSA owner, the owner's spouse can incur qualified medical expenses that can be covered by FSA funds.

Understanding a Flexible Spending Account (FSA)

An FSA is a tax-free account that is available to salaried employees; it can be sponsored and maintained by eligible employers. Contributions to an FSA account have an annual limit, which is adjusted for changes in the cost of living by the IRS every year. In 2019, the contribution cap for FSAs is $2,700. Contributions are exempt from federal income tax, federal unemployment tax, Social Security, and Medicare taxes. To qualify for tax-free status, distributions from an FSA must not exceed contributions in a particular calendar year, and the funds must be spent on qualified medical expenses.

These are costs incurred to treat or alleviate a medical condition. Most cosmetic procedures, such as teeth whitening, a facelift, or liposuction, are not allowed. However, some illnesses or accidents lead to physical injuries that can be treated with surgeries and procedures typically considered cosmetic in nature. In these scenarios, FSA funds can be used to pay for these specific cosmetic surgeries as they are performed to treat a medical condition.

Who Can Use FSA Funds?

In addition to the FSA owner, the owner's spouse can incur qualified medical expenses that can be covered by FSA funds. Distributions from FSAs can also be used by dependents who are claimed on the owner's tax return. If a dependent earns gross income in excess of $4,150, files a joint return, or can be claimed as a dependent on somebody else's return, they are not eligible.