A "Less" Flexible Savings Account, Starting in 2011

Flexible spending accounts, or FSAs, are an excellent way to pay for healthcare expenses using pre-tax money. These voluntary, employer-sponsored programs, allow employees to save a portion of their income on qualified medical expenses incurred during their benefit plan year for themselves and covered dependents. The contributions, maxed at $5,000 for 2010, are deducted from an employee's pay into an FSA and are tax-free, resulting in a substantial payroll tax savings. One key drawback to the FSAs is the "use it or lose it" rule. Any funds remaining at the end of the benefit year, including the two-and-a-half-month allowable extension, are forfeited. They may be applied to future plan administrative costs or can be equally allocated as taxable income among all plan participants.