Flexible spending accounts originated under the Revenue Act of 1978 as a way to help families afford rising costs. The idea was to empower wage earners with a way to plan ahead for medical expenses. Today, FSAs are available for health and dental spending, as well as dependent care costs.
FSAs get funded with pre-tax employee dollars for eligible expenses during the calendar year. Employers can also contribute to the annual maximum allowed. FSAs are typically “use it or lose it” accounts.
The Employee Benefit Research Institute® (EBRI®) estimates that more than 3.2 million FSAs were active at the end of 2022. Together, these FSAs totaled $3.6 billion in employee and employer contributions. There are several types of flexible spending accounts that you can offer to your employees.
Health care FSAs cover employees and family members, including dependent children aged 26 and under. The FSA pays for things like deductibles, copays, prescriptions, over-the-counter medications, durable medical equipment (DME), and feminine care products. IRS Publication 502 outlines all covered and non-covered medical expenses.
Dependent care FSAs help alleviate the worries and costs of caring for children (under age 13) or elderly family members. These funds can be used for child or adult day care and in-home care during working hours. Preschool and summer camp costs are also eligible under a dependent care FSA.
Limited purpose FSAs (LP-FSA) are an add-on for high-deductible health plans with a health savings account (HSA) for medical costs. LP-FSA funds cover qualified dental and vision expenses only.
Flexible spending accounts also benefit the employer because the plans are funded with pre-tax employee payroll dollars. This means the employer does not pay Medicare or Social Security (FICA) taxes on pre-tax compensation contributed to an FSA.
Flexible spending accounts are an employee benefit option offered during open enrollment. Employees decide how much they want to contribute to their FSA for the year. Employers can also contribute to an employee’s FSA if desired.
The 2024 limit for health care FSA contributions is $3,200. Dependent care FSAs max out at $5,000. Contributions occur via payroll deduction and cannot change until the next plan year. The only exception is if there is a qualifying event, such as a birth or adoption.
The total amount of expected annual FSA contributions is available on day one of the plan year. Employees can begin using these dollars right away, even if they have not yet made the full annual contribution. Most FSAs provide employees with a debit card for purchases under the plan. Preauthorized purchases are automatically substantiated (approved), while other spending may require proof from the member to be substantiated.
Examples of substantiated expenses include:
Expenses requiring member substantiation include:
FSA funds do not typically roll over from year to year. However, an employer can allow for a 2.5-month grace period into the following year. This year, they can also choose to give a maximum rollover of $640 into plan year 2025. According to the EBRI:
Employers can direct their employees to the FSA Store for eligible products covered by their flexible spending account. The store offers 2,500 products for online purchase with available FSA funds. It is a good resource for spending money that would otherwise go unused at the end of the plan year.
Employees should also know that any costs funded by a flexible spending account cannot be claimed as tax deductions. This is because the dollars are already tax-deferred as payroll deductions.
Learn more about how Flexible Spending Accounts can benefit your employees with planned contributions for eligible expenses.
All references to “Highmark” in this communication are references to Highmark Inc., an independent licensee of the Blue Cross Blue Shield Association, and/or to one or more of its affiliated Blue companies.
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