What is a Flexible Spending Account (Section 125)?

What is a Flexible Spending Account (Section 125)?

There are two types of Flexible Spending Accounts, also known as Section 125 accounts, and it is optional to set either one up:

  1. A Medical FSA is a special account that you sign up for to put money in through payroll deductions to pay for certain out-of-pocket health care and dental expenses for you, your spouse and eligible dependents.

  2. A Dependent FSA is an account, funded with payroll deductions also, set up to pay for eligible dependent care services such as child and adult care services, summer day camp, before and after school programs, etc. 

You do not have to pay taxes on the money in either account (no Federal income tax, social security taxes (FICA) and State taxes are taken) and you can sign up for both accounts if you want.

The IRS regulates these accounts and there is a maximum amount that is allowed for each. This amount varies each calendar year and for 2020, the maximum for a Medical FSA is $2750 and a Dependent FSA is $5000.