Do Employers Contribute to a Flexible Spending Account?

A Flexible Spending Account (FSA) is an employer-sponsored benefit program designed to help employees manage qualified medical or dependent care expenses with tax advantages. Individuals set aside pre-tax money from their salary, reducing taxable income and leading to savings on federal income taxes, Social Security tax, and Medicare tax. FSAs provide a structured way for employees to pay for health-related services and products not typically covered by insurance.

Understanding Employer Contributions to FSAs

Employers can contribute to an employee’s Flexible Spending Account, though they are not obligated to do so. These contributions can take various forms, such as “seed money” provided at the beginning of the plan year or matching contributions based on the employee’s own elected amount. For example, an employer might contribute a set amount, or they might match dollar-for-dollar once the employee contributes more than a certain threshold.

Employer contributions to an FSA are generally tax-deductible for the employer. For employees, these contributions are not included in their gross income, meaning they are received tax-free. This makes FSAs an attractive benefit for managing healthcare costs.

Rules Governing Employer FSA Contributions

Flexible Spending Accounts are governed by specific Internal Revenue Service (IRS) rules, primarily under Section 125 of the Internal Revenue Code, which oversees cafeteria plans. These plans allow employees to choose between cash (taxable income) and certain non-taxable benefits like FSAs. Employer contributions, alongside employee salary reductions, must comply with annual limits set by the IRS. For 2025, the employee contribution limit for a health FSA is $3,300. Employer contributions do not count against this limit, unless employees have the option to receive these contributions as cash or a taxable benefit.

FSA plans are also subject to non-discrimination rules to ensure they do not disproportionately favor highly compensated employees. These rules, under IRS Sections 105 and 125, involve tests related to eligibility and benefits. The plan must also follow the “uniform coverage rule,” meaning the full annual elected amount is available to the employee from the first day of the plan year, regardless of how much has been contributed via payroll deductions.

A rule for FSAs is the “use-it-or-lose-it” provision, meaning funds must be spent by the end of the plan year or be forfeited. However, employers can offer exceptions: a grace period of up to 2.5 months after the plan year ends to incur new expenses, or a carryover of a limited amount of unused funds into the next year. For 2025, the maximum carryover amount is $660. Employers can choose to offer either the grace period or the carryover, but not both.

Managing Your FSA Funds

Once funds, including any employer contributions, are in an FSA, employees can access them for qualified expenses. Common methods include using a dedicated FSA debit card for direct payment or submitting receipts for reimbursement. The debit card streamlines the process, while reimbursement requires employees to pay first and then file a claim. It is important to keep all receipts, as the IRS requires documentation for FSA purchases.

Eligible expenses for a health FSA are defined by the IRS and include a wide range of medical, dental, and vision care costs. This covers items such as deductibles, co-payments, prescription medications, and certain over-the-counter items. Dependent Care FSAs, a separate type of FSA, cover expenses for the care of qualifying dependents, such as daycare or preschool, to allow the account holder to work.

Employees should carefully estimate their annual expenses to avoid forfeiting unused funds due to the “use-it-or-lose-it” rule. Checking with the plan administrator or human resources department is advisable to understand the specific rules and deadlines of a particular FSA plan.