Flexible spending arrangement
What it is: A flexible spending arrangement (FSA), often called a flexible spending account, is a benefit that may be offered by large employers. It allows you to put aside money from your paycheck before it is taxed to pay health-related expenses that aren't covered by your insurance. By using pretax dollars, "you're effectively buying health-care services at a significant discount," explains Wayne Farlow, a certified financial planner, whose firm Financial Abundance LLC, is based in Westminster, Colo. How big a discount, of course, depends on your tax bracket. The higher that is, the more your savings. For the average wage earner, it translates into at least a 30% savings on your health-care expenses.
The money taken out of your paycheck is put aside in an account that your employer (or a subcontractor hired by your employer) oversees. You might be issued a debit card to pay for expenses directly, or your company might require you to submit receipts for each reimbursement. The legal limit of the account is $5,000, though some companies may have lower maximums.