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What are the Advantages of a Medical Flexible Spending Account?

By Christina Edwards
Updated May 17, 2024
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A medical flexible spending account, or medical FSA, allows employees to pull a certain amount of money out of their pre-tax wages. Medical FSAs save money for both employees and employers. Employees are able to pay for certain medical supplies and services not covered by health insurance, while reducing their taxable income. Because the employee's taxable income is lower, the employer will also pay less in taxes on his behalf.

When setting up a flexible spending account, typically an employee designates a certain amount of money he wants to set aside, which is usually deducted out of each paycheck. Taxes can not be taken out of this money, which reduces the taxable income, and he will pay less in taxes. Many employees who opt to set up flexible spending accounts often end up taking home more money each pay period, simply because they don't pay as much in taxes.

With a medical flexible spending account, like most FSAs, an employee is allowed to spend the money before the whole amount is even deposited. If needed, the money is available as soon as the account is set up. For example, an employee can pledge to put $1,500 US Dollars(USD) into his medical flexible spending account. If a medical emergency arises that costs $400 USD and he does not have enough in the account to cover it, he can still pay for it.

Originally, he would pay for expenses out of his own pocket then be reimbursed the amount after providing the proper documentation, such as receipts. Changes in the program, however, mean he doesn't necessarily have to seek reimbursement. Many companies have started to provide debit cards to employees with flexible spending accounts.

Debit cards that can be used to pay for things covered under a medical flexible spending account are often referred to as flex cards. These work just like a credit card, and employees can use them to pay for qualifying purchases. This reduces the hassle of dealing with paperwork and keeping track of receipts. Also, by using these cards, an employee does not have to wait to be reimbursed for these expenses.

Many places like pharmacies are also installing inventory information approval systems, which automatically check whether a consumer's purchases are eligible. Items that are allowed to be purchased with the medical flexible spending account will then be paid for with the card, and all other items will not. Eligible items typically include things like bandages, prescriptions, co-payments, over-the-counter medicines, and smoking-cessation aids.

In addition to saving money, employers can also benefit from a flexible medical spending account in another way. One disadvantage of a medical FSA for an employee is that any money that he doesn't use, he forfeits, and it goes back to his employer. This money can then either be distributed back to the employees or kept by the employer. It can then be used to reduce other costs of running the company.

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