Global HR Glossary

What is a Flexible Spending Account (FSA)? 

A Flexible Spending Account (FSA) is a tax-advantaged savings tool that allows employees to set aside pre-tax funds for eligible healthcare and dependent care expenses, effectively reducing taxable income while covering out-of-pocket costs for essential services.

Eligible Expenses, Contribution Limits, and Claims Submission

FSAs can be used for qualified medical expenses such as co-payments, deductibles, prescriptions, and certain dental and vision care costs. Dependent care FSAs cover childcare and eldercare expenses.

The maximum contribution for healthcare FSAs is typically around $3,200 per employer, while dependent care limits may vary.

To access FSA funds, employees must submit claims with receipts verifying eligible expenses along with a completed claim form.

Approved claims are reimbursed via check or direct deposit. Unused funds generally expire at the end of the plan year, although some employers may offer grace periods or allow a carryover of up to $640.

Tax Advantages and Compliance

FSA contributions are made with pre-tax dollars, lowering taxable income and exempting funds from federal income, Social Security (FICA), and most state taxes. Compliance with IRS guidelines regarding contribution limits and eligible expenses is essential to avoid penalties.

Employee Rights to FSA

Employees typically cannot change their FSA contributions during the year unless they experience qualifying life events. If an employee leaves their job, access to FSA funds usually ends unless COBRA continuation coverage is elected.

Employees can have both an FSA and a Health Savings Account (HSA), but the FSA must be limited to dental and vision expenses to meet HSA compatibility.