Save taxes on medical expenses

Jan. 1, 2020
A flexible spending arrangement (FSA) for medical care is an attractive benefit for employers and employees.

A flexible spending arrangement (FSA) for medical care is an attractive benefit for employers and employees.

FSAs are valuable to employers because they can be used to attract and retain top talent. The contributions are not subject to payroll taxes and the savings from the employer's portion of payroll taxes are generally enough to cover the administrative costs.

This arrangement allows employees to pay out-of-pocket medical costs with pretax dollars. What's more, because an FSA reduces adjusted gross income, it may make employees eligible for other valuable tax benefits. The total amount withheld from an employee's paychecks for the year is treated as a salary reduction for federal income tax, Social Security and Medicare purposes, as well as for state income tax purposes in many cases.

Typically, a participating employee allocates part of his or her salary to a special account to pay for qualified health care expenses. The employee chooses which expenses to pay during the year and saves tax on the deal because the contributions are not subject to income or payroll taxes.

Check with an advisor regarding other details and limits, as well as sources for plan administration and setup.