A Flexible Spending Account and a Health Savings Account are beneficial tools that allow families to use pretax dollars to pay for necessary medical expenses. A flexible spending account is offered through an employers cafeteria plan. The way a flexible spending account works is very simple. An employee can choose to defer a certain percentage of their salary into the account and withdrawal funds when needed to pay for out-of-pocket medical expenses and even over-the-counter drugs. The money that is used within the FSA is not subject to income or payroll taxes. However, the deferred income must be used within the plan year or the money will be forfeited back to the company. The employer also benefits from providing this option because the only cost they incur is maintenance of the funds. This allows employers to provide greater benefit choices to it’s employees without increasing out-of-pocket costs. Many FSAs allow the funds to be used to pay for dependent care. This is an excellent income tax savings tool for family’s with an income that is too large to fully utilize the dependent care credit.

A Health Savings Account can be established by anyone with a high deductible health insurance plan. Contributions to a health savings account are not subject to a “Use it of Lose it” policy which can allow for great earnings growth. When funds are contributed to an HSA, the earnings and withdrawals are not taxable as long as they are used for qualified medical expenses. Contributions to an HSA are limited to the health insurance plan deductible and are subject to a maximum level that changes annually. An employer may elect to contribute to an employee’s HSA and these contributions are excluded from the employee’s gross income. A Flexible Spending Account and a Health Savings Account may be valuable tool for a family. The specific details regarding the FSA can be found through one’s employer and for more information about HSA’s visit the IRS’s website. http://www.irs.gov/publications/p969/ar02.html#en_US_publink100038736