The Current State of FSAs, and How to Maximize this Employee Benefit

Flexible spending accounts are firmly entrenched in the benefits package for most American employers, particularly those with a large number of employees.

WorldatWork’s 2024 Total Rewards Inventory of Programs and Practices research found 91% of survey participants offered flexible spending accounts (FSAs) to some or all of their employees. Similarly:

• The U.S. Department of Labor’s Bureau of Labor Statistics reported that 47% of private-industry workers and 72% of state and local government workers had access to healthcare FSAs in 2024, while 43% of private-industry workers and 66% of government workers had access to dependent care FSAs.
• The Society for Human Resource Management’s 2023 Employee Benefits Survey showed 62% of polled employers offer medical FSAs and 57% offer dependent care FSAs.
• A 2023 study by Benepass found 86% of surveyed employers offered health FSAs and 63% offered dependent care FSAs.

FSAs can provide a true win-win for employers and their workers. However, such accounts can also have their share of hiccups, particularly this time of the year.

To level-set on this benefit and understand ways employers can maximize its success (to the organization and to the workforce), Workspan Daily (WD) connected with Sara Taylor, the senior director of employee spending accounts at WTW, for an FSA question-and-answer session.

Sara Taylor is a senior director at WTW and has expertise in employee spending accounts.

WD: From an employer perspective, what do you see as some of the biggest advantages of FSAs?

Taylor: Flexible spending accounts are a critical component of an employer’s overall benefits package. A competitive benefits package helps employers attract and retain talent. ... Employers also benefit from tax savings since FSA contributions are not subject to Federal Insurance Contributions Act (FICA) taxes.

WD: Coming at it from the employee side, what are some of the biggest advantages of this benefit?

Taylor: I would start with budgeting and cash flow. By using an FSA, employees can set aside money to pay for expenses they’re going to incur. With healthcare FSAs, employees can access the full amount immediately at the beginning of the year. That can provide needed cash flow for people who have large, planned medical expenses such as orthodontia or surgeries. With dependent care FSAs, employees cannot be reimbursed until payroll contributions are deposited into the account. However, dependent care FSAs can provide a consistent stream of reimbursement through the year, helping employees budget and pay for dependent care expenses. And last, but not least, all FSAs provide employees with tax savings [since elected withdrawals from wages are taken pre-tax].

WD: What are some of the biggest misconceptions or missteps from employee participants in regard to FSAs?

Taylor: Per Internal Revenue Service requirements, all reimbursements from FSA must be verified as an eligible expense. In many cases, employees must provide supporting documentation, such as an itemized bill from the dentist, to verify the expense is eligible for reimbursement. One common mistake is that the documentation provided doesn’t have enough detail to verify the expense.

Also, employees sometimes struggle with the types of expenses that can be reimbursed from the accounts. For example, summer camps that enable parents to work are reimbursable from the dependent care FSA if they’re daytime-only programs. Overnight summer camps are not an eligible expense.

In addition, one of the most important aspects of year-end planning for FSAs [and an area of frequent misstep] is the “use it or lose it” rule. Depending on the employer’s plan design, employees must incur eligible expenses before the plan year’s end or soon thereafter, to avoid forfeiting any remaining money in the account.

[An Employee Benefits Research Institute (EBRI) report released in May 2024 found nearly half of FSA accountholders forfeited funds to their employer in 2022. The average forfeiture was $441. A Benepass study found 40% of workers with FSAs forfeit money from their account each year.]

WD: Now and going into the new year, how can employers and their total rewards professionals help employees better avoid these missteps?

Taylor: Employers can help employees by providing regular, ongoing communication about how to efficiently use the accounts, such as reminders on what is or is not an eligible expense, clearly articulating deadlines to submit claims, and clarifying what details need to be included on receipts or other documentation to verify the expenses.

[Regarding deadlines and account balances,] understanding the provisions for the carry-over and grace period is essential for employees in maximizing their healthcare FSA benefits. The carry-over provision allows employees to carry over a certain amount of unused healthcare FSA funds into the next plan year, while the grace period provision extends the deadline to incur eligible expenses for up to an additional two and a half months. [TR pros should] clearly communicate which provision applies to your plan and how your employees can take advantage of these options to avoid losing their funds.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Benefits
• Total Rewards