A Flexible Spending Account (FSA) is a pre-tax benefit that lets employees set aside part of their paycheck to cover eligible medical or dependent care costs. Employers sponsor the account, and unused funds are usually forfeited at year's end.
How an FSA Works
An employee picks a contribution amount during open enrollment, and that amount gets deducted from each paycheck before taxes apply. This lowers taxable income for the employee and payroll tax costs for the employer.
The full annual election is often available on day one, even before the employee has contributed that much. Employees then use the funds for qualified expenses like copays, prescriptions, or approved dependent care services, usually through a debit card tied to the account or by submitting receipts for reimbursement.
Types of FSAs
Not all FSAs cover the same expenses. A Health FSA pays for medical, dental, and vision costs. A Dependent Care FSA covers childcare or eldercare for dependents who need supervision while the employee works. A Limited Purpose FSA only covers dental and vision, usually paired with a Health Savings Account.
Companies with staff across different roles often manage several of these plans at once, which is why benefits data needs to stay connected to broader HR records. Payrun's solution for Finance Managers keeps contribution data aligned with payroll so nothing gets miscalculated at tax time.
FSA Contribution Limits and the Use-It-or-Lose-It Rule
The IRS sets an annual cap on how much an employee can contribute to a Health FSA, and that limit adjusts most years for inflation. Dependent Care FSAs have a separate, generally higher cap.
The biggest catch with an FSA is the use-it-or-lose-it rule. Any money left in the account at the end of the plan year is forfeited to the employer, unless the employer offers a grace period or allows a limited carryover. This makes accurate forecasting important, especially for employees managing time off through leave management tools, since planned absences often affect projected medical or dependent care costs.
FSA vs HSA: What's the Difference
An FSA and a Health Savings Account (HSA) both offer pre-tax savings for health costs, but they work differently. FSA funds typically expire at year's end, while HSA funds roll over indefinitely and can even be invested. HSAs also require the employee to be enrolled in a high-deductible health plan, while FSAs don't have that restriction.
Employers comparing benefits platforms often weigh how well each option integrates with existing payroll and HR systems. Teams evaluating alternatives sometimes compare setups like Payrun vs Deel to see which platform handles benefits deductions with less manual work.
