Flexible Spending Arrangement (FSA): Definition and Overview
A Flexible Spending Arrangement (FSA) is a tax-advantaged benefit program sponsored by employers that allows employees to contribute pre-tax dollars toward eligible medical-related expenses. These can include prescription medications, copayments, medical supplies, and certain over-the-counter items. However, FSAs do not cover health insurance premiums or long-term care services.
How FSAs Operate
When an employer offers an FSA option, employees can authorize payroll deductions to fund their account with pre-tax income, which effectively lowers their taxable wages. In some cases, the employer may also contribute to the FSA. Most FSAs are “use-it-or-lose-it”, meaning funds not spent by the end of the plan year are forfeited, unless the employer includes a rollover provision or grace period.
In 2025, employees can contribute up to $3,300 to an FSA. If both spouses have access to FSAs, they can each contribute the full amount individually.
Types of Flexible Spending Arrangements
While the Healthcare FSA is the most well-known type, there are several other specialized FSAs:
- Dependent Care FSA – Covers expenses related to child care and dependent elder care, including daycare, preschool, and after-school care.
- Adoption FSA – Allows employees to set aside funds for adoption-related costs on a pre-tax basis.
- Commuter FSA – Offers pre-tax savings on transportation costs such as parking and transit passes.
- Limited-Purpose FSA – Typically used alongside a Health Savings Account (HSA), this account reimburses only eligible dental and vision expenses.
Advantages of FSAs for Employees
FSAs allow employees to lower their taxable income while preparing for medical expenses throughout the year. One key benefit is that the full annual election amount is available at the beginning of the plan year, regardless of how much has been contributed to date. This can be especially helpful for employees who anticipate recurring healthcare costs.
Why Employers Choose to Offer FSAs
Employers can benefit from FSAs by reducing their payroll tax obligations, as employee contributions are not subject to federal income tax, Social Security, or Medicare taxes. FSAs can also support employee retention and morale, making them a valuable part of a company’s overall benefits strategy. Tools like Beyond can streamline FSA administration, helping businesses remain compliant with ACA and other healthcare regulations.
Eligibility Guidelines
FSAs are available only through employer-sponsored plans. Employees may enroll if their employer includes an FSA option in the benefits package. Individuals with marketplace insurance, sole proprietors, or those owning 2% or more of an S Corp, partnership, or similar entity, are typically not eligible to participate in FSAs.
Comparing FSAs and HSAs
Both FSAs and Health Savings Accounts (HSAs) are designed to help employees manage healthcare costs, but they operate differently. FSAs are compatible with any employer-sponsored health plan, while HSAs require enrollment in a high-deductible health plan (HDHP).
With an FSA, the full annual contribution is available from day one of the plan year, but unused funds may expire at year-end unless the plan includes rollover or grace period features. HSAs, by contrast, allow funds to roll over indefinitely and remain with the employee, even after changing jobs or health coverage.
Final Thought
Employers looking to add value to their benefits offerings can turn to Beyond to help manage FSA administration efficiently and remain compliant, while giving employees a tax-saving tool that supports their financial and healthcare well-being.