The benefit of a FSA is that it is offered by various employers as an option in their cafeteria plan and amount of money deducted towards FSA is exempted from payroll taxes. Other major advantage of FSA is that the full amount one sets aside for his calendar FSA contribution is available on the first day of coverage for expenses.
However, FSAs do not have a “carry-over” option and any amount that remains unused by the end of the year is lost by the employee (also known as the “use it or lose it” rule). Employers also face a pre-funding risk on account of FSAs as there is no provision to reclaim the funds spent by an employee through FSA who quits the job in the middle of the year. Substantiation for reimbursement against Over the Counter drugs and other generic medical items has also been an issue faced in implementing FSAs.
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