Can an Employer Contribute to an FSA?

Flexible Spending Accounts (FSAs) are tax-advantaged accounts that allow individuals to set aside pre-tax money for eligible healthcare or dependent care costs. Administered through an employer, FSAs help participants manage out-of-pocket expenses not covered by their primary insurance plans.

Employer Contributions to FSAs

Employers can contribute to Flexible Spending Accounts. While not mandatory, many employers choose to contribute to enhance their benefits package. These contributions typically apply to two main types of FSAs: Health FSAs and Dependent Care FSAs.

Health FSA employer contributions can take several forms. An employer might offer a fixed amount to all participating employees, regardless of the employee’s own election. Another common approach involves matching a portion of employee contributions, incentivizing participation. Some employers may even combine these methods, providing a base contribution along with a match. Employer contributions are a discretionary choice, reflecting their specific plan design and objectives.

Dependent Care FSAs also allow for employer contributions, although the structure might differ. In both cases, the employer’s contribution is determined by the plan sponsor and outlined in the plan documents. These employer contributions can increase the total funds available in an employee’s FSA, providing financial relief for eligible expenses.

FSA Contribution Rules and Limits

The Internal Revenue Service (IRS) establishes annual limits for contributions to FSAs. For Health FSAs, the employee contribution limit for 2025 is $3,300. This limit applies to amounts employees contribute through payroll deductions. If an employee’s spouse also has a Health FSA through their employer, each spouse can contribute up to the annual limit through their respective plans.

Employer contributions generally do not count towards the employee’s annual contribution limit for Health FSAs, provided employees cannot elect to receive these contributions as cash or a taxable benefit. This means the combined total in an employee’s Health FSA could exceed the individual salary reduction limit if the employer also contributes. However, non-discrimination rules apply to Health FSAs, ensuring that the plan does not favor highly compensated employees.

For Dependent Care FSAs, the maximum annual contribution limit is $5,000 per household for those filing jointly or as a single caretaker, or $2,500 for married individuals filing separately. This limit includes contributions from both the employee and the employer.

Tax Advantages of FSA Participation

Participating in an FSA offers tax advantages for both employees and employers. For employees, contributions to an FSA are made with pre-tax dollars, meaning the money is deducted from their gross income before federal income tax, Social Security, and Medicare taxes are calculated. This pre-tax treatment effectively reduces the employee’s taxable income, leading to a lower overall tax liability. For example, an employee contributing the maximum to a Health FSA in 2025 could see savings on their tax bill.

Employers also benefit financially from FSA participation. Contributions made by employees to FSAs are not subject to the employer’s portion of FICA (Federal Insurance Contributions Act) taxes, which include Social Security and Medicare taxes. This reduction in payroll taxes can result in savings for the business, especially as more employees participate in the program. Employer contributions to FSAs are generally tax-deductible for the business. When funds are distributed from an FSA for qualified expenses, reimbursements are tax-free for the employee, enhancing the financial benefit.

FSA Fund Management and Usage

FSAs generally require participants to spend their allocated funds within the plan year, known as the “use-it-or-lose-it” rule. Any money remaining in the account at the end of the benefit period is typically forfeited. This rule underscores the importance of carefully estimating anticipated expenses when electing an FSA contribution amount.

However, employers can offer exceptions to this rule to provide more flexibility. One common exception is a grace period, which allows employees an additional 2.5 months after the end of the plan year to incur eligible expenses and use remaining funds. Another option is a carryover provision, which permits a limited amount of unused funds to be rolled over into the next plan year. For 2025, the maximum carryover amount for Health FSAs is $660. Employers can offer either a grace period or a carryover, but not both.

Employees typically access their FSA funds through a debit card linked to the account or by submitting claims for reimbursement with proof of expense. Health FSA funds can be used for a wide range of qualified medical, dental, and vision expenses, including co-payments, deductibles, prescription medications, and certain over-the-counter items. Dependent Care FSA funds are specifically for eligible dependent care services necessary for the account holder and their spouse to work, such as daycare, preschool, and before- or after-school care for children under 13, or care for a disabled spouse or adult dependent.