HR GlossaryFlexible Spending Account (FSA)

What Is a Flexible Spending Account (FSA)? | HR Glossary

A flexible spending account (FSA) allows eligible employees to pay for qualified healthcare expenses by setting aside pre-tax money into a tax-free account via payroll deductions. 

What is an FSA? 

A flexible spending account (FSA) allows eligible employees to set aside pre-tax money into a tax-free account and use this money to pay for eligible medical (or dental or vision) expenses. The amount contributed is taken out of each paycheck. 

There is also a form of an FSA called a dependent care FSA. This type allows people to use funds to cover eligible child and in rare cases, adult care expenses. Some examples include: 

  • Daycare
  • Preschool
  • Summer camp

Some things to know about FSAs: 

  • FSA reimbursements do not have to be paid back to the employer if the employee is terminated or quits during the benefits plan year.

  • The IRS sets an annual contribution limit for FSA, which may change from year to year.

  • Employers may allow employees to carry over a portion of unused FSA funds from one plan year to the next, subject to plan terms and applicable limits.
  • If a carryover is permitted, employees may still be eligible to contribute up to the full annual contribution limit for that plan year.

Why are flexible spending accounts important to small businesses and human resources managers? 

Offering an FSA is a win-win for employers and employees. FSAs help reduce the tax burden for both parties and minimize out-of-pocket spending on workers’ healthcare items. Moreover, if you’re a human resources manager, you’re likely looking for ways to appeal to prospective employees and attract top talent. 

As a small business, you might not be able to offer the most robust health insurance benefits. If your company can’t offer health insurance, an FSA might be a way to appeal to prospective candidates and signal that you care about your people’s overall health and well-being. TriNet's research from The State of Employee Benefits 2025 report found FSAs show solid participation, with 47% of eligible employees enrolled and 44% contributing the maximum allowed, reflecting a growing awareness of the financial advantages these accounts offer.

Summary 

A flexible spending account allows eligible employees to set aside pre-tax money via payroll deductions into a tax-free account. They can use this money to pay for eligible healthcare expenses. Both employers and employees receive tax savings from FSAs. Some companies also offer dependent care FSAs to cover eligible child and in rare cases, adult care expenses.