IRS Rules & Regulations for FSA Accounts

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FSA accounts, or flexible spending accounts, are set up for employees to have certain amounts deducted from their pay on a tax-preferred basis. Discover why expenses used for FSA accounts must be used for specific medical conditions with information from an independent CPA in this free video on IRS rules and regulations.

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Video Transcript

My name is Miranda Chook and I'm a CPA. We're talking about FSA accounts. FSA, or flexible spending accounts are accounts that were set up for employees to have amounts deducted from their pay to on a on a tax preferred basis to pay for medical expenses, most commonly. It can also be used for dependent care expenses and sometimes for other expenses. Now the benefit of these flexible spending, or FSA accounts, again is that they are set up by your employer. The maximum amount that you can contribute each year is usually set by your employer and they are withheld from your pay, but taxes are not withheld. Federal income tax is not withheld, Social Security and Medicare. So that's one of the benefits for sitting it aside. Now the types of expenses that you can use or that are that qualify to be paid for with those funds must be used for a specific medical condition such as for a pregnancy or diabetes and not just to improve your general health. They can also be used for dependent care expenses for dependents that live with you, most commonly childcare. It can also be used for care for parents that live with you or even long term care services that may live elsewhere. Now you have to determine at the beginning of the year if you want to participate in this plan or not. The other thing you have to think about is how much you want to have deducted from your pay. Now be careful here because if you are unable to use all those funds by the end of the year, you actually forfeit that money. You don't just lose the tax benefit of that money, you lose the money. For more information, you can refer to the IRS's publication nine-six-nine on health savings accounts.

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