What is an FSA?
An FSA, or flexible spending account, is a special type of savings account that allows employees to set aside pre-tax dollars to pay for eligible healthcare expenses. FSAs can be used for things like doctor’s visits, prescription medications, dental work, vision care, and certain over-the-counter products.
For small business owners, offering an FSA as part of your benefits package can help your team save money on medical costs while reducing your business’s payroll tax burden. If you’re looking for a simpler way to manage payroll and benefits, sign up for Homebase to keep everything organized in one place.
How an FSA works
Employees contribute a set amount of their paycheck to the FSA before taxes are deducted. These funds can then be used throughout the year for qualifying medical expenses. Because the contributions are pre-tax, employees lower their taxable income, which means they pay less in taxes overall.
Key features of an FSA:
- Pre-tax contributions – Reduces employees’ taxable income
- Annual contribution limits – For 2025, the IRS limit is $7,000 per employee
- Use-it-or-lose-it rule – Typically, funds must be used within the plan year, though some plans allow a short grace period or limited carryover
- Eligible expenses – Includes copays, deductibles, prescriptions, dental and vision care, medical supplies, and certain over-the-counter products
Employees can use their FSA funds via a debit card provided by the plan administrator or by submitting receipts for reimbursement.
Types of FSAs
There are several types of FSAs, including:
- Healthcare FSA – Covers most out-of-pocket medical, dental, and vision expenses
- Dependent care FSA – Used for eligible childcare or dependent care expenses, like daycare or elder care
- Limited-purpose FSA – Typically available to those with an HSA (health savings account); covers only dental and vision expenses
Understanding which type of FSA your business offers helps ensure your team gets the most out of their benefits.
Why FSAs benefit small businesses
Offering an FSA can be a smart move for small businesses because it:
- Improves employee satisfaction – Helps your team save on healthcare expenses
- Reduces payroll taxes – Contributions are made pre-tax, which lowers your business’s FICA tax obligations
- Strengthens your benefits package – Makes your business more competitive when hiring and retaining employees
Even if your business is small, FSAs are often available through payroll service providers or benefits brokers.
Employee eligibility and contribution rules
- Who is eligible? Typically, any employee enrolled in the FSA plan offered by the employer.
- Who sets the contribution amount? Employees choose how much to contribute at the start of the plan year (up to the IRS limit).
- When can changes be made? Usually only during open enrollment or after a qualifying life event (like marriage, birth of a child, or loss of other coverage).
Employees should plan carefully since unused funds may not roll over, depending on your plan’s rules.
Common eligible expenses for an FSA
Some common healthcare costs that FSAs can cover include:
- Doctor’s office copays
- Prescription medications
- Dental cleanings and orthodontics
- Vision exams, glasses, and contact lenses
- Over-the-counter pain relievers, allergy medicine, and first aid supplies
- Medical equipment like crutches, braces, or blood pressure monitors
Always refer to the official IRS list of eligible expenses or your plan administrator’s guidelines for details.
How to communicate FSA options to your team
When offering an FSA, clear communication is key. Make sure employees understand:
- How to enroll and select their contribution amount
- The types of expenses that qualify
- The "use-it-or-lose-it" rule or any applicable grace period or carryover options
- How to submit claims or use their FSA debit card
Providing resources like FAQs or benefit guides helps your team get the most out of their FSA.
How Homebase helps with payroll and benefits management
Homebase makes it easier to handle payroll, benefits, and team management in one place—so you can focus on running your business instead of getting stuck in paperwork.
With Homebase, you can:
- Automate payroll processing and tax filings
- Manage deductions for benefits like FSAs
- Keep track of employee contributions and benefits enrollment
- Store benefit documents securely and stay compliant with labor laws
- Simplify new hire onboarding and benefits enrollment
Explore Homebase payroll to handle payroll and benefits the easy way, helping you support your team’s financial well-being while staying organized and compliant.