Definition
A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax dollars — up to IRS-defined annual limits — for qualified medical, dental, and vision expenses. Unlike HSAs, FSAs are subject to a 'use-it-or-lose-it' rule: funds not used by the plan year's end (or within a grace period or carryover limit allowed by the plan) are forfeited. FSAs are employer-owned accounts and are not portable when the employee leaves. Dependent Care FSAs operate similarly but cover eligible dependent care expenses rather than medical costs.
What This Means for Employers
FSAs provide employees a meaningful pre-tax savings mechanism and cost you relatively little to offer — in fact, employers save payroll taxes on employee FSA contributions. The use-it-or-lose-it feature is both a limitation and a design consideration: employees tend to under-use FSAs out of fear of forfeiture, which reduces their actual benefit. Incorporating a grace period or the maximum allowable carryover into your plan design encourages participation and improves employee satisfaction. FSAs can be offered alongside any health plan type, unlike HSAs, which require HDHP enrollment.
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Understanding the terminology is the first step. Applying it to your specific situation —
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