Maximizing Employee Benefits with Flexible Spending Accounts

Life has a way of raining down unexpected costs. A trip to urgent care, a child’s dental procedure, or even a round of prescriptions. That’s where a Flexible Spending Account (FSA) can help. Acting like a financial umbrella, an FSA offers protection from those sudden downpours of out-of-pocket expenses.

In this edition of Benefits Architecture: Learn the framework. Elevate the design., we explore how FSAs work, what they cover, and why they remain one of the most useful tools in your benefits program.

What is a Flexible Spending Account?

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside a portion of their paycheck before taxes are withheld. These funds can be used to pay for eligible out-of-pocket healthcare expenses incurred during the plan year, including any applicable grace periods.

FSAs are relatively low-cost to administer and highly flexible, allowing organizations to customize features such as carryover options or contribution limits, and offer more personalized benefits that meet the needs of a diverse workforce. And because contributions are made on a pre-tax basis, payroll taxes (FICA) are reduced, generating significant annual savings that can be reinvested into other benefits or wellness programs.

Get the most out of your Flexible Spending Account

There are two primary types of FSAs employers can offer:

1. A Health Care FSA, which reimburses employees for qualified medical expenses that are not covered by their health insurance, such as copayments, deductibles, prescriptions, vision care, and dental treatments.
2. A Dependent Care FSA, that helps employees cover the cost of caring for qualifying dependents such as children or dependents incapable of self-care. Eligible expenses include child care, preschool or care for a disabled dependent.

An annual limit, set by the IRS, determines the amount employees can contribute to their Flexible Spending Accounts each year. For 2025, employees can contribute up to $3,300 to a Health Care FSA. This limit is set to increase to $3,400 in 2026. For Dependent Care FSAs, the contribution limit is $5,000 per household (or $2,500 if married and filing separately) in 2025, and will increase to $7,500 per household (or $3,750 if married and filing separately) in 2026.

Employers can choose to set lower limits within their plans, but they cannot exceed these IRS-mandated maximums without compromising the tax-qualified status of the plan.

Protecting employee contributions.

In addition to the contribution limit, most FSA’s are subject to a “use-it-or-lose-it” rule, meaning any funds not used by the end of the plan year are forfeited. Employers can choose to offer one of two flexibility options to help employees avoid losing the benefit. The first is a grace period that provides an extension of up to 2.5 months after the plan year ends. The second is a carryover, which allows employees to roll over a limited amount of unused funds into the next year. For 2026, the IRS permits employers to allow a carryover of up to $680.

Although FSAs provide significant advantages to both employers and employees, administering them can be challenging. Navigating IRS regulations, managing plan requirements, and educating employees on how to use their accounts effectively take time and expertise. Partnering with a trusted consultant can help.

Get expert guidance on FSAs and your employee benefits - today.

Previously, we walked through Understanding the Life of a Medical Claim, and what a claim could look like for an employee who experiences a visit to the emergency room for abdominal pain and a subsequent appendectomy. In this edition, we will dissect how an FSA can be helpful after a visit to the ER, where an employee can be left with high out-of-pocket costs.

An FSA can help by providing:

• Tax Savings: FSA contributions are made with pre-tax dollars, lowering taxable income resulting in lower out-of-pocket medical expenses through tax savings.
• Immediate Access to Funds: A key advantage of an FSA is that the full annual elected amount is available at the start of the plan year, even before all contributions are made. This provides immediate reimbursement for large, unexpected expenses like an ER visit.
• Relief for Out-of-Pocket Costs: FSAs can be used for medical expenses not fully covered by insurance, including copays, deductibles, and coinsurance, as well as other qualified costs such as post-surgery prescription medications. This helps lower overall out-of-pocket spending and makes healthcare more affordable.
• Stress Reduction: Knowing that there are dedicated, pre-tax funds available to cover unexpected medical bills can significantly reduce the stress and anxiety employees may feel when faced with a medical emergency.

Outside of emergency situations, the IRS specifies that FSA-eligible expenses must be primarily used to prevent or treat a physical or mental health condition and must be documented by a qualified healthcare professional. Eligible expenses span a wide range of healthcare needs such as deductibles, copayments, and coinsurance, as well as preventive care such as annual exams, and vaccinations.

FSAs can also be used for vision and dental services, prescriptions, approved medical equipment, and certain therapies like counseling, acupuncture, and physical therapy. Other qualified expenses may include transportation for medical care, guide dogs, fertility treatments, and pregnancy tests.

For a complete list of eligible expenses, refer to IRS Publication 502.

Protection from life’s downpours

No one can predict when life’s storms will roll in, but an FSA helps employees stay prepared when they do. By setting aside pre-tax dollars, they can manage out-of-pocket healthcare and dependent care costs with less stress.

When life happens, whether it’s a routine doctor visit or an emergency surgery, an FSA can help ensure your employees stay covered, supported, and secure under the benefits umbrella you’ve built.

If you want to learn more about Flexible Spending Accounts, contact us today.

Cost figures, coverage details, and plan design elements presented in this blog are for illustrative purposes only and do not reflect any specific insurance policy or provider. Actual costs will vary based on your organization’s health plan, the insurance carrier, provider contracts, and the specifics of each medical situation. Employers and employees should refer to their official plan documents or speak with their broker or benefits consultant for guidance if needed.