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Even if an employee is enrolled in a medical insurance plan, there are always medical costs that are not covered by the policy. A flexible spending arrangement allows an employee to pay for these medical expenses with funds that are not subject to income tax. Funds are placed in what is referred to as a flexible spending account (FSA) or flex account.

What Is a Flexible Spending Arrangement?

An employer may establish a Flexible Spending Arrangement as part of a Section 125 cafeteria plan. Such arrangements are described in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. The most common flexible spending arrangement involves contributions from an employee’s wages into a flexible spending account (FSA) or flex account. The employer may also contribute to an employee’s FSA. All funds contributed to the account are not subject to federal income or employment (FICA) taxes.

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