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Flexible spending accounts

Small business owners may be able to facilitate access to flexible spending accounts for their employees, which can be a useful benefit offering that allows individuals to allocate pre-tax dollars for medical expenses, dependent care and commuter costs. 

What are Flexible Spending Accounts?

Flexible Spending Accounts (FSAs) are tax-advantaged accounts that can be funded with pre-tax dollars. These accounts are designed to help cover eligible, out-of-pocket expenses for healthcare, dependent care and commuter costs. Employers can set up these accounts to help their employees save every year, though there are FSA contribution limits. You may be able to use your FSA to cover expenses such as healthcare deductibles, dental and vision expenses, over-the-counter medications, and much more. 

Key considerations:
  • FSA contributions are made pre-tax, meaning that you are not subject to employment or federal income taxes on those contributions.
  • FSA contributions don’t need to be reported on your income tax return.
  • FSA contributions are funded every pay period, but you don’t have to wait until the account is fully funded to use the total amount of your contributions.
  • Small business owners and employees can use the allocated funds starting on January 1 following the enrollment period.
  • Generally, FSA contributions are “use it or lose it.” Terms and conditions apply. 
  • Self-employed individuals are not eligible for FSAs.
  • If you offer FSA benefits, you generally can’t combine and/or offer it with HSA benefits.
How can business owners implement FSAs? 

Implementing FSAs into your business can come with its own set of requirements, so it’s best to talk to an expert to help you understand the process and how you can facilitate this benefit to your employees. 

Types of FSAs

Healthcare FSA: This account allows participants to pay for healthcare costs, like deductibles, copayments, coinsurance, and some prescription drugs and over-the-counter medications. Learn more about qualified medical expenses. In 2024, employees can make annual contributions for healthcare of up to $3,200 through payroll deductions. However, if you don’t spend the total amount of your FSA contributions by the end of the year, you can still carry over a balance to the following year of up to $640. 

Commuter Benefits FSA: This account allows participants to set aside pre-tax funds to pay for qualified transit and parking expenses associated with their work commute. In 2024, the monthly limit on commuter benefits is $315 and can be rolled over from month to month. 

Dependent care FSA: This account allows to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs, and child or adult daycare. In 2024, employees can make annual contributions on dependent care of up to $5,000 per household or $2,500 if married and filing separately. However, IRS regulations do not allow carryover of dependent care FSA.

Learn more about FSAs.