Flexible Spending Account Definition

A flexible spending account, or FSA, is a type of employee benefit allowing employees to set aside pre-tax dollars that are later used to reimburse tax-exempt, qualified expenses including child care or uncovered medical expenses. Use of a FSA makes the impounded funds tax-exempt but also subjects them to strict use and potential forfeiture. Reimbursement is managed by an account management company and documentation requirements to claim refunds are often strict. Funds unused at the end of the calendar period are forfeited. FSA deposits are set aside at a periodic rate that must be determined in advance, which often makes an accurate annual amount difficult to estimate. Nevertheless, conservative use of an available FSA allows most employees to pay fewer taxes.