What is a flexible spending arrangement?

A flexible spending arrangement allows employees to get reimbursed for medical or dependent expenses from an account set up with pre-tax dollars; the money is deducted from your salary and deposited into a separate account, and not included under taxable wages on a W-2. The salary reductions are not subject to Social Security or federal income tax, so that medical and dependent care expenses can be paid tax free. However, under a flexible spending arrangement, if you do not use the FSA contributions in the taxable year, you forfeit the remainder, though the employer may amend its cafeteria plan to allow a 2.5 month extension.