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Flexible Spending Arrangements

Flexible spending arrangements (FSAs), allow employers and employees to use pre-tax dollars to pay for certain personal expenses that aren't otherwise covered by insurance.

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

How FSAs work. 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. 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.

Example

Your employee, Gussie Finknottle, who earns $20,000 in salary, elects to place $3,000 in a FSA. 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.

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