What are FSAs?

Flexible Spending Accounts (also known as Cafeteria Plans) are set up by employers and allow certain employee expenses to be paid before payroll taxes are deducted from income, thereby potentially reducing federal and state payroll taxes. Some qualified expenses are daycare costs, insurance premiums and most out-of-pocket medical costs. Employees contribute to the plan in small increments throughout the plan year, so FSAs are generally pre-funded by the employer.

Therefore, any unused money is forfeited back to the company, and not the employee, at the end of the plan year. FSAs do not transfer when an employee leaves the company. Dependent care FSAs cannot be prefunded and are subject to restrictive IRS requirements.