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The Tax Benefits of Flexible Spending Accounts for Businesses

Lauren Hargrave · March 4, 2024 · 5 min read

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When employers compile their benefits package, they have to look at the value it brings to both the employee and the company. For a benefits package to be valuable to the employee, it must help them meet their everyday needs as well as improve their physical, mental and financial health. For the benefits package to bring value to the company, it must first be valuable to the employees, but it must also help the company save money and improve productivity.

The Flexible Spending Account (FSA) can serve all these goals. By offering a Flexible Spending Account (FSA), employers can offer employees a benefit they will value, while also saving money on taxes. Here’s how.

How do Flexible Spending Accounts work?

FSAs are accounts into which employees and employers can deposit pre-tax money for employees to use on approved health-related or dependent care expenses, depending on the type of FSA that’s offered. All FSAs must be employer-sponsored, so people can  only access them through their place of work. 

Employees must elect to participate in their employer’s FSA during open enrollment and must choose at that time how much they will contribute to their account over the course of the year. The employer will then deduct the appropriate amount from the employees’ paychecks, which will also lower an employees’ taxable income. At the start of the plan year, the entire amount the employee has pledged for the year is available to them, regardless of how much they’ve actually contributed up to that date. Additionally, the only way they can change their contribution amount during the year is if they experience a qualifying life event like the birth of a child. At the end of the plan year, employees forfeit any unused funds to the employer unless the employer allows employees a grace period in which to use their remaining money, or allows them to roll over a portion of their balance.

Employees’ contributions are tax-free when they’re made and remain tax-free when they’re spent on approved purchases. Employers can also contribute to employees’ FSAs.

There are three kinds of FSAs:

  • Medical FSAs

  • Dependent Care FSAs

  • Limited Purpose FSAs

Contributions to Medical FSAs can be used for qualified health-related expenses like copays and sunscreen, contributions to Dependent Care FSAs can be used for child care and adult day care expenses that allow the employee to work, and Limited Purpose FSAs can be used for approved dental and vision expenses. Dependent Care FSAs and Limited Purpose FSAs can be paired with an HSA, while an employee is prohibited from contributing to an HSA and Medical FSA at the same time. 

All three types of FSAs can be paired with any type of health, dental or vision insurance plan.

Should I offer an FSA to my employees?

A recent survey published in Forbes showed that 40% of employers think their workers quit for a job that offers better benefits. That’s 40% of employers that must spend 3-4x the employees’ salaries to replace their lost talent. This number doesn’t take into account lost productivity, lost industrial knowledge, the hit to company culture, and other “hidden” costs that come with high employee attrition. 

But this is a preventable problem. It’s also a problem that has a money-saving solution. That’s where the FSA comes in. 

One of the biggest draws in terms of benefits is employer-sponsored health insurance. To offer this benefit, employers (especially small employers) might not have the luxury to give employees a wide range of health insurance plan options. In fact, there might only be one health insurance plan that works from both an employee coverage and the employer budget perspectives. Regardless of which type of plan that is, the employer can pair it with any type of FSA to further support employees in paying for health and dependent care-related expenses.

The employees deposit their money pre tax, and because of this, they can save up to 37% on their health-related expenses, depending on their tax bracket. They also have the freedom to use their money to pay for hundreds of qualified health expenses or on necessary child care. This is why FSAs are often called a “flexible benefit”. To see how much employees can save with an FSA, use our FSA savings calculator.

In addition to empowering employees to use their tax savings how they want, FSAs help employers save on taxes. They also help employers save on the cost of employee attrition, presenteeism, and absenteeism that costs American companies over $1 trillion per year by giving employees a way to pay for their physical and mental wellness, as well as their financial needs. 

What are the tax benefits?

The pre-tax nature of FSA contributions allow employers to take advantage of two different forms of tax savings.

Payroll tax savings

When employees contribute money to their FSAs, the contributions are taken out before taxes are assessed. This lowers their net taxable income, which lowers their employers’ FICA responsibility.

Other tax breaks

When employers contribute to employees’ FSAs, it’s not just an attractive benefit for employees, it’s also a tax write-off for the company. That’s because employers can typically write off their contributions to employees’ FSAs as a business expense.

Ways Lively can help

Lively offers a suite of flexible benefits that employers can use to build the best package for their company. Our proprietary technology enables us to integrate into your existing systems and ensure you get set up quickly and easily and with the support you need. We work directly with employers’ payroll providers to arrange for the necessary deductions and we handle employee onboarding, education and support.

We offer best-in-class platform design for both administrators and employees, industry-leading customer service and a dedicated customer support team to ensure that you achieve your business and benefits goals.

If you’re ready to up-level your benefits package, reach out 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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