Annual limits
The IRS sets the maximum employees can contribute each year and adjusts it periodically. Employers may also contribute.
All coverage
Coverage
Flexible Spending Account
A Flexible Spending Account lets employees set aside pre-tax pay for eligible expenses.
Who it's for
An FSA lets employees stretch their paychecks by paying predictable expenses with pre-tax dollars, at little cost to the employer.
- Employees with regular out-of-pocket medical, dental, or vision costs
- Working parents paying for child care
- Employers who want a valued benefit that also reduces payroll taxes
What it covers
Typical coverage includes
- Health care FSA: deductibles, copays, prescriptions, dental, vision, and other eligible expenses
- Dependent care FSA: child care for children under 13 and care for other qualifying dependents so employees can work
- Limited-purpose FSA: dental and vision expenses for employees with an HSA
How it works
How an FSA works
Set up the plan
The business adopts a written Section 125 plan, picks an administrator, and chooses between a carryover and a grace period.
Employees choose an amount
During open enrollment, each employee decides how much to set aside for the year, up to the IRS limit.
Contributions come out pre-tax
The election is divided evenly across the year's paychecks, before income and payroll taxes.
Employees spend the funds
Employees pay for eligible expenses with an FSA debit card or submit receipts to the administrator for reimbursement.
Before you decide
Common considerations
Use it or lose it
Unused health FSA funds are generally forfeited at year end. Plans can soften this with either a carryover of a limited amount or a grace period of up to two and a half months, but not both.
Uniform coverage
Employees can use their full annual health FSA election from the first day of the plan year, even before it's been deducted from their pay. Dependent care FSAs only pay out what has been contributed.
Plan documents
An FSA requires a written Section 125 cafeteria plan and annual nondiscrimination testing, which an administrator usually handles.
FAQ
Frequently asked questions
What is the difference between an FSA and an HSA?
An HSA requires a high-deductible health plan, belongs to the employee, and rolls over year to year. An FSA works with any plan, is tied to the employer's plan, and generally must be used within the plan year.
Can employees change their FSA election mid-year?
Only after a qualifying life event, such as marriage, a birth, or a change in employment status.
What happens to an FSA when an employee leaves?
Health FSA coverage usually ends on the last day of employment unless they continue it through COBRA. Expenses from before that date can still be claimed.
Can business owners participate in an FSA?
Sole proprietors, partners, and more-than-2% owners of an S corporation generally can't. C corporation owners who are employees can.
What does an FSA cost the employer?
Mainly an administrator's fee, typically charged per participant. The payroll tax savings on employee contributions often offset much of it.
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