Health Care FSAs: What You and Your Employees Need to Know

A health care flexible spending arrangement — or health care FSA, sometimes referred to as a flexible spending account — allows employees to use tax-free funds to pay for some or all of their out-of-pocket medical expenses.

The money that employees elect to contribute to their FSAs is payroll deducted throughout the year, and employers can choose to match employee contributions. The money is available to employees in full as of the first day of the plan year, so they don’t have to worry about building up their funds before being able to obtain needed medical care.

Although FSAs make it easier for employees to afford medical care, employers retain significant control over their employees’ FSAs. The IRS limits the amount employees can contribute to an FSA, but employers can set lower limits. Employers can also decide whether to match employee contributions, and whether to allow employees an option to access FSA funds after the end of the plan year. Money remaining in the account stays with the employer at the end of the year (unless the employer chooses to offer a grace period or carryover option), or if the employee leaves the job. Employers also save money in payroll taxes when employees opt to defer part of their wages into an FSA.

infographic explaining important information about Flexible Spending Accounts for employers and employees

How do health care FSAs work?

  • Employees choose how much they want to contribute (up to IRS and employer limits)
  • Contributions aren’t subject to income taxes or payroll taxes
  • Contributions are payroll deducted throughout the year
  • All of the money for the year is available on day 1
  • Expenses can be paid with an FSA debit card or submitted for reimbursement
  • Contributions/withdrawals don’t have to be reported on your tax return
  • “Use it or lose it” by the end of the year (with some exceptions)

How many people have health care FSAs?

  • Nearly 2/3 of employers offer health care FSAs
  • An estimated 33 million Americans have health care FSAs

You don’t have to earn as much to pay for care

Example: Effective tax rate of 25%:

  • Buying eyeglasses that cost $200.
  • Without an FSA: You need to earn $267 in order to have $200 left after taxes.
  • With an FSA: You only need to earn $200, and can use it all to buy glasses.
  • Need to pay a $2,000 deductible?
  • Without an FSA you need to earn $2,667 to cover it. With an FSA, you only need to earn $2,000.

Spending your health care FSA money

You can use your FSA funds for qualified medical expenses

  • for yourself
  • for your spouse
  • for any dependents you claim on your tax return
  • for your children who are under age 27 (even if not a dependent)

Expenses that can be reimbursed from an FSA

  • copays
  • deductibles
  • coinsurance
  • dental/vision expenses
  • out-of-network medical expenses
  • non-medication health care products (bandages, thermometers, etc.)

Expenses that cannot be reimbursed from an FSA

  • anything that’s reimbursed by insurance or another source
  • health insurance premiums
  • over-the-counter medications without a prescription (except insulin)
  • cosmetic procedures

FSA 101: Planning ahead

  • You decide how much to contribute during the coming plan year
  • You can’t change the amount mid-year without a qualifying event
  • You have to use the money by the end of the year (unless your employer offers a carryover or grace period)
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