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Definition: Flexible Spending Account
A flexible spending account plan is a benefit offered by employers to their employees wherein the employees can set aside a part of their pre-tax income for alternate spending such as medical expenses, in order to decrease their income taxes.
The alternate expenses for which part of the income is saved are also known as qualified expenses, and include medical and cafeteria expenses. In some cases in the US, there are separate plans for medical expenses and others such as child care. The most common type of arrangement there is the Health FSA scheme.
Generally, such an arrangement is set up by employers to help their employees save part of their taxable income. The amount set aside for the qualified expenses is not taxed, as per the plan, and hence results into considerable tax savings for the employee.
However, there are negative aspects to FSA. The sum of money to be set aside for this benefit has to be determined in advance, and generally, there is an upper limit. Also, if any part of the amount is not used by the end of the specified period, the employee loses that amount.
John’s taxable income is Rs. 10,00,000 per annum. The tax rate is close to 35%. So, using the FSA scheme, for every Rs. 100 he uses for the plan, he saves Rs 35, which would have otherwise been deducted as tax.