What is an FSA and how does it work? An FSA is an employer-sponsored spending account that allows employees to set aside pretax earnings to pay for eligible health care or dependent care expenses. Pretax funds are deducted from each paycheck and automatically deposited into an FSA account. Employees decide how much to contribute, tax-free, for the year.
What are the benefits of an FSA to employees? Pretax contributions lower taxable income, and reimbursements are made tax-free from the employee’s account. In addition, an employee has access to the entire elected amount on the first day of the plan year.
How do employers save money? FSA programs can lower employers’ FICA taxes on employee payroll and possibly what is paid for other benefits plans, such as workers’ compensation and disability, that are based on employees’ taxable income.
Per the IRS, the following limits apply:
The maximum amount that can be contributed to a Medical FSA in 2024 is $3,200. The maximum for 2025 is TBA.
The maximum amount that can be contributed to a Dependant Care FSA in 2024 is $5,000. The maximum for 2025 is $5,000.
Depending on their tax bracket, an employee can save nearly 30% on most medical, health, and child or elder care expenses. An employee earning $30,000 with a $2,000 FSA contribution can save an estimated $300 in taxes.
How is an FSA funded? Employees make pretax contributions through automatic payroll deductions. Employers can also decide to contribute, up to a maximum amount.
What is the main difference between an FSA and an HSA? With both an HSA and a FSA, account holders make tax-deductible contributions. HSAs are individually owned while FSAs are owned by the employer.
You keep your HSA balance until you spend it and the account belongs to you even if you switch employers or retire. With an FSA, any money in the account at the end of the plan year is forfeited to your employer. Anyone can contribute to your HSA account. An FSA must be funded exclusively through employer contributions or employee pre-tax contributions.
Is a debit card available? Yes. A Visa® debit card is available for eligible medical expenses, and can be used at the point of purchase or after care.
This card is issued by the Bancorp Bank, pursuant to a license from Visa U.S.A. Inc. and can be used for qualified expenses wherever Visa debit cards are accepted.
What happens when a terminating employee's reimbursements exceed contributions for that year? Employees have access to the full annual FSA election amount at the beginning of the year, so there's always a risk that an employee could use their FSA allotment and terminate before they've fully funded the account through payroll contributions. Just as employees risk forfeiting their money if they don't spend it in time, employers risk this money if the employee terminates before their contributions have caught up to their reimbursements.
Employers may not withhold additional funds from the employee's final paycheck to make up for those funds, and the employer also cannot send the employee a bill to recapture those funds. Additional payroll contributions beyond the final paycheck can only be made if the employee elects to continue their plan through FSA COBRA.
