A Flexible Spending Account (FSA) is a type of tax-advantaged financial account that allows employees to set aside a portion of their pre-tax earnings to pay for qualified medical or dependent care expenses. Offering an FSA can be a win-win situation for employers and employees as it is a valuable employee benefit. When employees have access to pre-tax dollars for healthcare and dependent care expenses, it can ease financial burdens and make the overall compensation package more attractive.
When trying to decide if implementing an FSA program is right for your organization, it is important to carefully consider the administrative requirements to ensure compliance. Consulting with a benefits specialist can provide valuable insight into structuring and managing an FSA effectively.
There are two main types of FSAs – Healthcare FSA (HCFSA) and a Dependent Care FSA (DCFSA). A Healthcare FSA is used to pay for eligible medical, dental, and vision expenses that are not covered by insurance plans. Qualified medical expenses may include deductibles, copayments, prescription medications, medical supplies, and certain preventive care services. HCFSA funds can be used for the employee, their spouse, and dependents. The Dependent Care FSA allows employees to use pre-tax dollars to pay for qualified dependent care expenses, such as daycare, preschool, before and after-school care, and summer day camps.
Employees can make contributions to an FSA on a pre-tax basis. This means that the money contributed to the FSA is deducted from their paycheck before taxes are calculated. As a result, both the employee and the employer can save on taxes since the FSA contributions reduce the taxable income. Employers can also save on payroll taxes as FSA contributions are exempt from payroll taxes such as Social Security and Medicare. This can result in significant savings for the employer. In addition to tax savings, FSAs assist employees in managing out-of-pocket healthcare and dependent care costs. These can be significant expenses for many individuals and families. Employers contribute to their employees' financial wellness by providing a way to pay for these costs with pre-tax dollars through the FSA.
Human Resources departments can work with benefits providers to customize FSA plans to suit their company's workforce and budget. This includes setting contribution limits, offering carryover or grace periods for unused funds, and providing educational resources to help employees maximize their FSA benefits. Human Resource professionals play a key role in ensuring that FSA plans comply with IRS regulations and other applicable laws. The IRS sets annual contribution limits for FSAs. As of 2024, the limit for healthcare FSAs is $3,200 per year per employee, and the limit for dependent care FSAs is $6.400 per year per household. FSAs are also operated under a "use-it-or-lose-it" rule, meaning that funds not used by the end of the plan year are forfeited. However, recent IRS regulations allow for a carryover of up to $640, adjusted annually for inflation, or a grace period of up to 2.5 months after the plan year ends to spend unused FSA funds. It’s vital that Human Resources professionals stay informed about changes in healthcare regulations and communicate effectively with employees about FSA rules and benefits.
Overall, FSAs provide a valuable way for employees to save money on eligible expenses by using pre-tax dollars, making them a popular and beneficial component of employee benefits packages.