Flexible Spending Account (FSA)
An arrangement you set up through your employer to pay for many of your out-of-pocket medical expenses with tax-free dollars. These expenses include insurance co-payments and deductibles, and qualified prescription drugs, insulin and medical devices. You decide how much of your pre-tax wages you want taken out of your paycheck and put into an FSA. You don’t have to pay taxes on this money. Your employer’s plan sets a limit on the amount you can put into an FSA each year.
There is no carryover of FSA funds. This means that any FSA funds you don’t spend by the end of the plan year cannot be used for expenses in the next year. An exception is if your employer’s FSA plan permits you to use unused FSA funds for expenses incurred during a grace period of up to 2.5 months after the end of the FSA plan year.
(Note: Flexible Spending Accounts are sometimes called Flexible Spending Arrangements.)