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Are Flexible Spending Account Deductions Pre-Tax?

Lauren Hargrave · July 25, 2022 · 5 min read

FSA expenses tax deductible

The primary benefit to employees that buy health insurance and contribute money to a Flexible Spending Account (FSA) is their ability to access medical care and dependent care without taking on a huge financial burden. Pre-tax deductions (aka tax-deductible expenses) are a big part of the financial benefit of health insurance and FSAs.

The benefits to employers that offer health insurance and FSAs include: healthy, productive employees, complying with the Affordable Care Act (ACA) and the ability to deduct the amount both they and employees pay for premiums and contribute to their FSAs. There are special rules regarding highly compensated and key employees, so make sure to review IRS guidelines before writing your cafeteria plan.

The quick answer

Yes, the money employees contribute to their FSAs is deducted from their paychecks before income taxes are assessed. That means contributions are made “pre-tax” or are “tax-deductible”, and aren’t included in employees’ effective gross income (EGI) for income tax purposes.

Since employees’ contributions are taken before any taxes are assessed, they are also deducted from the payroll taxes employers must pay for contributing employees. If employers choose to make contributions to employees’ FSAs, these contributions are tax-deductible for employers and will not be counted as part of employees’ EGI.

What are pre-tax deductions

Pre-tax deductions refer to the money employees can choose to deduct from their paycheck to pay for a range of benefits that include (but are not limited to):

Employers subtract the appropriate amount from each paycheck to pay for the employees’ chosen benefits, and then assess the appropriate income, medicare, social security and payroll taxes. Since the deductions are subtracted from each paycheck prior to taxes being assessed, they are referred to as “pre-tax deductions”.

What are post-tax deductions

Post-tax deductions refer to money employees can choose to have their employers direct from their paychecks, after taxes have been subtracted, to pay for benefits that aren’t eligible for a pre-tax deduction. An example of a post-tax deduction is: a contribution an employee makes to their Roth IRA or an employer-sponsored emergency savings account.

Which one is better?

When trying to decide whether or not pre or post-tax is better, your gut instinct might be: pre-tax is always better. When it comes to health insurance and FSAs, we tend to agree with you. If you can set aside money in order to pay for medical and dependent care, and transportation costs, pre-tax, you can end up saving up to 37% on those costs, depending on your tax bracket.

But that doesn’t mean you should dismiss post-tax deductible benefits. For instance, when it comes to retirement benefits, there are two types: pre-tax deductible and post-tax deductible. A 401k is an example of a pre-tax deductible retirement benefit. You don’t pay taxes on contributions in the year you make them, but you do pay taxes on the distributions you take in retirement. Conversely, while Roth IRAs are post-tax deductible, meaning you pay income taxes on your contributions in the year you make them, you don’t pay taxes on the distributions you take in retirement. Contributing to a retirement savings account is beneficial, no matter when you receive the tax benefit.

How does it work?

FSAs can be paired with any health plan, which makes it a benefit that’s easy for all employees to take advantage of. If an employee chooses to contribute to an FSA during open enrollment, they will designate how much they want to contribute for the year (up to the annual limit set by the IRS). The employer will then deduct the appropriate amount from each paycheck. But here’s the important part: the employee is eligible to withdraw their entire allocated amount for the year as soon as the account is active. Even if they haven’t deposited the entire amount yet.

So, if they have an expensive and/or unexpected procedure mid-plan year (or even at the beginning), they will have access to their full annual amount to pay for their qualified out-of-pocket expenses.

Many FSA administrators give plan participants access to debit, credit and stored value cards linked to their account so they can use their FSA to pay for expenses at the point of purchase.

If employees don’t use all of their FSA money by the end of the plan year, employers have three options: they can force employees to forfeit what remains, they can give employees a 2 ½ month grace period during which they can use their remaining money, or they can allow a $570 rollover to the following year. If the employee takes advantage of any grace period or rollover, it will not affect their annual limit for the following year.

Choosing an FSA provider

  • Employers looking for an FSA provider should consider the following factors: Cost

  • Ease of use for both employer and employees

  • Features it offers like debit cards, account management via a smartphone app

  • Customer support for plan participants

Most FSA providers will charge a per participant monthly fee in addition to set-up and other administrative fees. They also offer varying levels of support and have different processes for reimbursement and account usage. To find the right FSA for your company, you will have to find the FSA provider that offers the easiest plan for employees to use at a cost that works for you.

Get started with Lively

If you’re looking for an affordable FSA that’s easy for employers to navigate and employees to use, reach out to Lively today.

Lauren Hargrave

Lauren Hargrave

Lauren Hargrave is a writer from San Francisco who focuses on technology, finance and wellness. She follows comedians like most people follow bands and believes an outdoor sweat session can cure almost any bad mood. She’s also been writing her first novel for so long, her mom doesn’t ask about it anymore.

piggy bank on pink background


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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.



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