Flexible Spending Account Tax Advantages
Flexible Spending Accounts (FSAs) can be advantageous to both the employer and the employee. A Flexible Spending Account (also known as a flexible spending arrangement) is a special account you put money into that you use to pay for certain out-of-pocket healthcare costs. The contributions to a healthcare or dependent care FSA are made on a pretax basis; therefore, they aren’t subject to either income tax or employment taxes.
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As a result, your company saves the employer’s share of the employment taxes on amounts employees contribute to their FSAs. Additionally, the administrative cost for employers is generally relatively modest.
The employees have an even greater advantage, they save both income and employment taxes. For 2016, contributions limits to health care FSAs are $2,550 and dependent care FSA limits are $5,000.