Many employers that provide health insurance to their employees offer the option of a Flexible Spending Account, which is an account that holds money the employee can use for qualifying health care expenses. Having a flex account allows workers to obtain tax benefits and set aside funds for the year's expected medical costs.
About Flex Accounts
Flexible spending accounts allow employees to contribute tax-exempt funds toward their yearly medical costs. If an employee chooses to open a flex account, he will elect an amount to contribute to the account at the beginning of the year. His employer will deduct this amount from his annual salary before taxes and will withhold it in equal portions each month. Throughout the year, the employee can use this money to pay his or his dependents' medical expenses.
An employee can only use the funds in his flex account to pay for qualifying medical expenses. To qualify, the expenses must relate to the care of the employee or one of his dependents. The expenses must also relate to the treatment or prevention of a disease or condition. Expenses related to non-prescription medications or cosmetic treatments don't qualify. Employees can't use flex account funds to pay for insurance premiums or any expense that another insurance plan covers, either.
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Since employees don't pay tax on the income they contribute to a flex account, they can't deduct the expenses they pay using funds from the account on their income taxes. However, flex accounts typically provide a better tax benefit than medical deductions because all income contributed to a flex account is tax-exempt, whereas employees can only deduct medical expenses that exceed 7.5 percent of their adjusted gross income.
If a balance remains in an employee's flex account at the end of the year, he forfeits it. He won't be able to withdraw it or keep it in his account for the following year. However, some employers may allow employees to use these funds for medical expenses for up to two and one-half months after the end of the year.