Flexible Spending Accounts (FSA)
Medical benefits are a key part of any employee benefits package. In addition to standard health insurance, employers can offer valuable options like Flexible Spending Accounts (FSAs)—an IRS-recognized, pre-tax benefit that helps employees save on out-of-pocket health care expenses. FSAs allow workers to plan for qualified costs while reducing their taxable income, creating both financial and wellness advantages.
What is a Flexible Spending Account?
A Flexible Spending Account (FSA) is an employer-sponsored benefit that lets employees use pre-tax dollars to pay for qualified medical expenses. This includes many healthcare expenses not fully covered by an insurance plan, such as copayments, deductibles, and eligible over-the-counter items. FSAs reduce an employee’s taxable income, resulting in potential tax savings throughout the year.
How Contributions and Spending Work
Both employers and employees can contribute to an FSA. When employees contribute, the funds come out of their paychecks on a pre-tax basis, reducing their taxable income. If an employer contributes, the employee still receives the same tax-free reimbursement benefits—often viewed as an added value to their health plan.
In most cases, FSA funds must be used within the plan year, though some plans may offer a grace period or limited carryover depending on how the employer structures the benefit.
Why Employees Value FSAs
FSAs allow employees to set aside pre-tax dollars to pay for qualified medical expenses, lowering their taxable income and increasing potential tax savings. These accounts can be used for a wide range of health care expenses, including prescriptions, over-the-counter items, and other out-of-pocket costs not fully covered by a traditional insurance plan.
By planning for known expenses, employees can better manage their annual healthcare budget and reduce unexpected costs throughout the year.
Eligible Expenses and Contribution Limits
FSAs can be used for a wide variety of FSA-eligible expenses beyond what a typical insurance plan might cover. Qualified costs include:
- Copayments, deductibles, and coinsurance (excluding premiums)
- Dental expenses such as exams, fillings, and orthodontics
- Vision expenses, including eye exams, contact lenses, and eyeglasses
- Over-the-counter medications, first aid items, and bandages
- Birth control, feminine care, and wellness-related products
- Therapy, including telehealth, mental health, and group sessions
- Medical equipment like crutches, braces, and wraps
- Acupuncture, acupressure mats, and alternative care tools
The IRS sets annual contribution limits. For 2024, the maximum for a Health Care FSA (HCFSA) is $3,200. These funds must typically be used during the calendar year, though some plans may include a grace period or allow a limited carryover amount. Staying informed about yearly changes is key to maximizing tax-free savings and planning for qualified medical expenses.
Managing and Accessing FSA Funds
FSA contributions and reimbursements are designed to be simple and flexible for both employees and employers. Here’s how it typically works:
Contribution Timing
Employers may make FSA contributions at the start of the calendar year, while employees can either contribute upfront or spread contributions out across their paychecks. All contributions are made on a pre-tax basis, offering immediate tax savings.
Spending Methods
Employees can pay for eligible expenses out of pocket and then request reimbursement through their online account. Many FSAs also include a debit card, allowing employees to pay for qualified medical expenses at the point of sale.
Third-Party Administration
To protect confidentiality and ensure smooth processing, many employers partner with a third-party administrator to handle account management, verify expenses, and issue reimbursements.
Use It or Lose It
Employees are responsible for using their FSA funds within the plan year. Most plans require that funds be used for care provided within the same calendar year, although some allow a grace period or a limited carryover amount. This is often referred to as the “use it or lose it” rule.
Key Difference Between FSAs and HSAs
Both Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) offer tax-free savings on eligible healthcare expenses, but they function differently. FSAs provide immediate access to the full annual election and are best suited for employees with predictable medical costs. HSAs, on the other hand, allow for long-term savings and more flexible rollover rules, making them a better fit for those enrolled in high-deductible health plans.
How toMaximize FSA Benefits
Employees can make the most of their Flexible Spending Account by planning ahead and using funds strategically. Common qualified medical expenses include dental care, vision expenses, therapy sessions, and even acupuncture–so budgeting for routine needs is a smart way to avoid losing unused funds.
Plan for Predictable Expenses
Employees should factor in expected copayments, specialist visits and recurring treatments early in the plan year. This ensures the funds are used for essential health care expenses first.
Don’t Overlook Eligible Items
Out-of-pocket expenses for injuries, like wraps, braces, and other medical devices, are typically FSA-eligible. Educating employees on these options can increase utilization and reduce delays in care.
Use Grace Periods Strategically
If your plan offers a grace period, employees can save less urgent purchases, like sunscreen, heating pads, or eligible skincare products, for the end of the year. Encourage smart use of any carryover to prevent losing funds under the use-it-or-lose-it rule.
Employer Communication
Employers should remain employees of their remaining FSA funds in November or December, helping them take full advantage of their pre-tax dollars before the end of the plan cycle.
FAQs About Flexible Spending Accounts
What’s the difference between an FSA and an HSA?
A Flexible Spending Account (FSA) is not the same as a Health Savings Account (HSA). FSAs are employer-sponsored, have stricter limits, and typically follow the use-it-or-lose-it rule. HSAs allow for year-to-year rollover and are only available to individuals enrolled in high-deductible health plans.
Can FSAs be used to pay health insurance premiums?
No. FSA funds cannot be used for health insurance premiums. However, they can be used for many out-of-pocket expenses like copayments, prescriptions, and medical supplies.
What is a Letter of Medical Necessity?
A Letter of Medical Necessity (LMN) is written by a licensed healthcare provider and may be required for certain FSA-eligible expenses like air purifiers, doulas, or other non-standard health-related items. Without it, reimbursement may be denied.
What happens to unused FSA funds?
Unless your plan offers a grace period or carryover, unused FSA funds are typically forfeited at the end of the plan year. This is commonly known as the use-it-or-lose-it rule.
What’s the difference between a Health Care FSA and a Dependent Care FSA?
A Health Care FSA (HCFSA) is used for medical expenses, such as doctor visits, prescriptions, and qualified medical expenses for you and your dependents. A Dependent Care FSA (DCFSA) helps pay for dependent care expenses like daycare, preschool, or in-home caregiver support for children under 13 or dependents with disabilities. Contribution limits and rollover options differ between the two.
Offer FSAs Through Progressive
Flexible Spending Accounts (FSAs) help employees save on healthcare expenses while reducing their taxable income, making them a smart addition to any employee benefits package. FSAs support financial wellness and allow for pre-tax spending on a wide range of qualified medical expenses.
If you’re looking to offer FSAs or need help managing an existing plan, Progressive Benefit Solutions is here to help. Our team can walk you through available options and simplify the process for both employers and employees.