The Benefits of a Flexible Spending Account (FSA)

Quick look: Flexible spending accounts (FSAs) benefit both employers and employees, offering tax advantages and enabling workers to save money on medical and dependent care expenses. Despite their benefits, managing these plans can be complicated and time-consuming. Here we define what FSAs are, what they cover, how they differ from HSAs, and how a professional employer organization (PEO) simplifies FSA setup, compliance, and administration.

Today’s top talent is looking for more than just standard health insurance; they want personalized benefits packages tailored to their individual needs. But offering these plans can be challenging for some small and midsized businesses (SMBs) with limited time, budget, and resources. One powerful yet cost-effective benefit that provides significant value for both employers and their staff is a flexible spending account (FSA).

In this article we’ll take an in-depth look at FSAs, including what they cover, how they compare to  health savings accounts (HSAs), and how a professional employer organization (PEO) can simplify FSA management for your business.

What is an FSA?

A flexible spending account (FSA) is an employer-sponsored benefit that allows employees to contribute pre-tax income toward qualified out-of-pocket medical or dependent care expenses.

What does an FSA cover?

Two primary types of FSAs exist, each designed to help employees manage specific out-of-pocket expenses:

• Healthcare FSAs can help pay for eligible medical, dental, and vision expenses that aren’t fully covered by insurance. Examples include prescription medications, copays, over-the-counter treatments, eyeglasses, and medical equipment.
• Dependent care FSAs reimburse workers for qualified dependent care expenses, such as daycare, preschool, after-school care, and eldercare.

In 2025, employees may contribute up to $3,300 to a healthcare FSA and $5,000 per household to a dependent care FSA, according to IRS guidelines.

How FSAs benefit the entire workforce

From helping workers make the most of their earnings to reducing an employer’s payroll taxes, FSAs offer multiple advantages to businesses and staff alike.

Benefits for employees

• Pre-tax savings: One of the primary benefits of an FSA is tax savings. FSA contributions are made pre-tax, which reduces employees’ taxable income, allowing them to keep more of their earnings.
• Immediate access to healthcare funds: Employees can access the full annual amount of their healthcare FSA from the beginning of the plan year, even if they haven’t made all their contributions yet. This can help them manage significant expenses that may occur early in the year, such as surgery or dental work. (Note: This is not the case for dependent care FSAs.)
• Support for everyday needs: A wide range of items are FSA-eligible, from allergy medications and sunscreen to breast pumps and first-aid supplies.
• Offset dependent care expenses: Child and eldercare costs families up to tens of thousands of dollars per year. However, a dependent care FSA allows working parents and caregivers to better manage these expenditures by using pre-tax dollars to pay for services.

Benefits for employers

• Lower payroll taxes: When employees contribute to FSAs, employers save too. Pre-tax contributions can reduce the business’s share of Social Security, Medicare, and unemployment taxes.
• Elevated benefits package: According to the Society for Human Resource Management (SHRM), 60% of employers offer healthcare FSAs, and 54% provide dependent care FSAs. Offering FSAs equips SMBs to compete with other companies by providing cost-effective financial wellness tools.
• Stronger employee engagement: Helping employees keep more of their income and mitigate healthcare and dependent care costs contributes to higher job satisfaction and loyalty.
• Cost-efficient: FSAs are relatively affordable to implement and maintain, especially when administered and managed by a PEO partner.

FSA vs. HSA: what’s the difference?

When considering tax-advantaged accounts, employers and employees often compare FSAs to health savings accounts (HSAs). While both offer valuable savings opportunities, only HSAs can earn interest or be invested, and FSAs are generally more accessible to a wider range of staff.

Here’s a quick breakdown of the key differences between FSAs and HSAs:

Feature	FSA	HSA
Employer-Sponsored	Yes	Yes, but must be paired with a  high-deductible health plan (HDHP)
Ownership	Employer	Employee
Funds Roll Over?	Limited rollover or grace period	Funds roll over year to year
Stays with Employee Upon Departure?	No (expires with job)	Yes (goes with employee)
Contribution Limits (2025)	$3,200 (healthcare) / $5,000 (dependent, per household)	$4,300 individual / $8,550 family
Pre-Tax Contributions	Yes	Yes
Investment Options	No	Yes

With a PEO partner, FSAs are a win-win

Despite their many perks, offering and managing an FSA isn’t always easy. Employers must navigate complex IRS regulations and plan rules, support employee enrollment, and educate workers on how to use their accounts effectively.

For time-strapped SMBs, these responsibilities can be tough to manage in-house, but that’s where a PEO like ExtensisHR steps in.

ExtensisHR partners with SMBs to simplify FSA setup, administration, and compliance so you can enjoy the benefits without the burden. Our comprehensive services include:

• Complete benefits management: We oversee the entire FSA lifecycle, including:
  • Plan design and documentation
  • Employee enrollment and onboarding
  • IRS compliance and non-discrimination testing
  • Year-end reporting and renewals
• Integrated payroll and benefits: As both your payroll and benefits administrator, we ensure seamless integration between FSA deductions and paycheck processing, reducing errors and manual tasks.
• Risk and compliance expertise: FSA plans must comply with strict IRS guidelines. Our compliance professionals stay current with federal and state regulations, helping employers stay protected.
• Employee education and support:

FSAs provide powerful tax advantages and financial flexibility for everyone involved. But to experience those rewards, SMBs need the right support. From compliance to payroll integration, ExtensisHR handles every detail, allowing you to focus on growing your business.

Looking to experience the benefits of an FSA in your organization? Learn more about ExtensisHR’s PEO solution or contact us today to get started.