Glossary
Flexible spending account, defined
An employer-sponsored arrangement that lets an employee set aside pre-tax salary to pay eligible medical, dental and vision costs, or separately dependent care costs, during the plan year. The money is elected in advance, deducted from each paycheck, and must largely be used within the year or it is forfeited.
In practice
The full annual medical election is available from the first day of the plan year even though it is funded across the year, which is useful for a planned expense early on. The use-it-or-lose-it rule is softened in some plans by a short grace period or a small carryover, but not both, and the employer chooses. It does not require a high-deductible plan, unlike a health savings account, but a general-purpose one blocks contributions to that account; a limited-purpose version for dental and vision only is the workaround. Leaving the employer usually ends the arrangement, and the election generally cannot be changed mid-year without a qualifying event. Dependent care versions reimburse only after the care has been provided.
A worked example
Suppose an employee elects $2,400 for the year, $200 a month, and has $2,000 of orthodontic work in February. She can pay the full $2,000 from the arrangement that month, having contributed only $400 so far. Suppose she then uses only $150 more all year; unless her plan allows a carryover, the remaining $250 is lost. Hypothetical figures.
Applies to: Health InsuranceDental & Vision Insurance