What Is an FSA? Learn How It Works and Which Purchases Are Eligible

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Is your team taking full advantage of their hard-earned perks? When it comes to flexible spending accounts, they might not be. Research shows 44% of participants leave valuable, pre-tax dollars on the table, with the average amount at around $370.

While an FSA is great for paying for health-related products and services, this account falls under the use-it-or-lose-it category. Being strategic about saving and spending is the key to tapping into this perk’s potential. But if your employees aren't maximizing their flex spending plan, there might be a disconnect between how much they truly understand about it and the ways it helps them save each year.

An attractive employee benefits package goes beyond employee appreciation—it speaks to your company’s values, attracts up-and-coming talent, and fosters a healthier, happier workforce. But an FSA may not feel like much of a reward if your employees think this benefit is costing them more than they’re saving in the end.

BambooHR offers solutions that help human resource professionals and business owners make benefits management a stress-free experience for all. In this article, we’ll take a deep dive into flexible spending accounts, spotlight some smart ways to cash in your funds, and provide tips for boosting FSA spend-down across the board.

What Is an FSA?

A flexible spending account (FSA) is a tax-advantaged, employer-sponsored health benefit. Also called a flexible spending arrangement, an FSA is used to pay for certain out-of-pocket healthcare expenses. A portion of each paycheck goes toward this account pre-tax, and (though not required) employers may add matching contributions.

An FSA covers a variety of needs, making it a highly versatile health benefit to offer. It’s used to pay for medical and dental copayments, prescription and over-the-counter drugs, as well as medical equipment and first aid supplies. Employees may get a debit/credit card to pay for qualified purchases or use their own money and submit a receipt for reimbursement.

And because employees are reducing their taxable income by contributing to their FSA, the organization is paying less in FICA taxes each year.

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A health savings account (HSA) is a similar tax-advantaged savings account for medical expenses but with different rules and limitations. The main distinction is an employee must have a high-deductible health plan (HDHP) to be eligible for an HSA (FSAs aren’t tied to specific insurance coverage).

The reasons why FSAs or HSAs are better won’t be the same for everyone—they depend on individual needs and circumstances. If your company offers both options, educating your team on the nuances of each will help them make the best choice for their situation.

Limited Purpose FSA

Employees typically hold either an HSA or an FSA (not both). However, your company can offer a limited purpose FSA (LPFSA) to HSA participants. Employees can use this account solely to cover out-of-pocket dental and vision expenses if their HDHP doesn’t provide those coverage options.

Keep in mind that an LPFSA and HSA can’t both be used for the same expense. In other words, your employees can’t be reimbursed twice for the same product or service.

FSA Limits

Participants can build up their savings accounts to a point. Similar to a retirement plan, FSA limits are set by the Internal Revenue Service (IRS). As of 2024, the annual FSA contribution limit is $3,200, providing even more funds for employees to use than in previous years.

What Is FSA Eligible?

If a health product or service is FSA eligible, or a “qualified medical expense,” this means you’re allowed to pay for it with the money in your flexible spending account. At first glance, this may sound restrictive, but it’s not just copays and prescriptions—you might be pleasantly surprised to learn that many everyday items qualify for FSA reimbursement.

FSA-eligible products may be bought in-store or online, making it easy for you to access the items you need. While some require a letter of medical necessity (LMN), a wide range of items meet FSA eligibility requirements, such as:

What Happens to Unspent FSA Money?

Participants must spend their FSA money by the end of the tax year or else it’s forfeited. Money lost typically goes back to the plan’s owner—the employer. But organizations can give their employees more time to make the most of their savings by building one of the following provisions into this benefit:

Setting money aside for medical expenses is a smart move, but it takes some planning on the employee’s part. Many people just don’t know how much money to save, while others may be unsure what items are FSA eligible. Tools like an FSA calculator can help them make closer estimations and avoid wasting unspent funds.

Get Started with a Flexible Spending Account

As an employee, an FSA may chip away at your paycheck each month, but you’ll end up paying less in taxes each year. Plus, those pre-tax dollars can be used to pay for a variety of health-related expenses, covering products and services when you need them most.

As a business owner or HR professional, you know how much it means to invest in the wellbeing of your team. Health benefits that help people meet basic needs can be the tipping point for many employees and job candidates. An FSA allows you to give your people more of what they want in a benefits package, as well as the financial freedom to take better control over their health.

Maximize Your FSA

It pays to have an FSA savings strategy in place—literally. The trick is to start budgeting for your FSA early and find ways to make your account work FOR you all year long. With careful planning, you can avoid missing out on everything it has to offer.

An FSA is simple to use, but it’s important to know how to use it well. Here are several ways to maximize your flexible spending account:

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HR Tips: Implement Flexible Spending Accounts In Time for Open Enrollment

Open enrollment season is the perfect time for your employees to start estimating contributions with an FSA calculator and sign up for this health benefit. It’s also a good time for you to proactively tackle some of those weak points in your communications strategy that may contribute to unused FSA money.

After all, the better prepared you are to educate your organization, the better prepared your employees will be to take advantage of everything your benefits package has to offer. Plus, putting helpful tools and resources at your team’s fingertips can help them make more impactful decisions about their wellbeing and financial future. Here are some steps you can take ahead of open enrollment at your company:

Don’t let open enrollment take you by surprise this year or any other year. Whether your organization is offering FSAs for the first time or the 7th year in a row, a little prep can go a long way in ensuring your employees feel confident in their choices. With an effective communication strategy and efficient benefits administration, you can streamline this process for everyone.

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