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What Are the Three Types of Flexible Spending Accounts (FSAs)?

A flexible spending account (or flexible spending arrangement) is a type of financial account that offers payroll tax savings to both enrolled employees as well as the employer. Funds are set aside pre-tax to reduce taxable income. These pre-tax funds can then be used for a variety of qualified expenses.

Set up by an employer for an employee, an FSA allows employees to contribute a portion of their regular earnings to be used to cover qualified expenses related to medical and dental costs.

Following the “Use it or lose it” rule, prior to the Patient Protection and Affordable Care Act, FSA funds that were not used by the end of the plan year were forfeited to the employer. Fortunately, the terms of the Affordable Care Act stipulate that a plan may allow an employee to carry over up to $500 into the following year without forfeiture of the funds.

The three types of flexible spending accounts
(also medical FSA or health FSA)

Contribution limit as of 2020: $2,750

This is the most common type of flexible spending account and is used for eligible medical, dental, and vision expenses. The account funds may be accessed using paper forms or an FSA debit card.

The FSA is similar to either a health savings account (HSA) or a health reimbursement account (HRA), except for the following distinctions:

  • HSA’s must be associated with a high deductible insurance plan. Funds in and HSA stay with an employee, even if they leave the company. FSA’s are commonly offered with more traditional health plans.
  • HSA funds don’t get forfeited at the end of the plan year, unlike funds in an FSA.
  • HRA’s, or Health reimbursement arrangement, offer reimbursement only after expenses are incurred. With an FSA, the entire balance for the year is typically available on January 1st.

2. Dependent care FSA

Contribution limit as of 2020: $5,000 per year per household.

This type of FSA is used for childcare expenses of children age 13 or under, or for the day care (day camps) of a qualifying adult, such as a spouse, parent, or grandparent, who cannot care for themselves and meet specific IRS guidelines.

Dependent care FSA funds cannot be use for the following:

  • Overnight camps for an eligible individual
  • Long-term care for individuals who live in an outside facility, such as in a nursing home

A dependent care FSA, unlike a medical FSA, is not pre-funded; that is, employees do not have the full amount of the annual contribution available on day one, but only up to the amount deducted during a given plan year.

3. Limited purpose FSA
(also limited expense FSA)

This a healthcare spending account whose use is limited to the reimbursement of eligible vision and dental expenses, regardless of any plan deductible. Eligible medical expenses incurred after the deductible is met may also be reimbursed at the employer’s discretion.

This FSA is usually paired with a Health Savings Account (HSA)—a feature that differentiates it from a health care FSA.

See available products for purchase with an FSA account with Health Shopper.

Learn more about how Payroll Systems can seamlessly integrate FSAs into its payroll service to help you empower your workforce. Web address or call to action link?

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.