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What is an FSA and Who Needs It?

Updated: Jul 29, 2021

Even with health insurance, there are a few things that your employees still have to pay for. Offering benefits like flexible spending accounts (or FSAs) can help your team reduce their out-of-pocket expenses.

FSAs are accounts set up by employers. Your staff can choose to contribute to it any amount they want per month - up to a certain limit. The amount in the FSAs can be used for two kinds of expenses: dependent care expenses (paying for child daycare) and another for approved medical expenses.

There are a few guidelines for employees to be eligible to open an FSA.

Guidelines to Opening and Owning FSAs:

  1. Self-employed individuals cannot open FSAs.

  2. All employees are eligible for FSAs, even if they don’t have health insurance.

  3. Employees must declare how much money their employers can deduct from their salary towards the FSAs every calendar year. This amount generally can’t be changed.

  4. Any employee who declines the FSA during open enrollment will have to wait until the next enrollment period if they change their mind.

  5. Employees can’t use FSAs to pay for their health insurance premiums.

FSAs vs. HSAs

The greatest disadvantage FSAs pose for employees is that any accrued money not utilized will be forfeited at the end of the year.

HSAs are different from FSAs in that the account is owned by the employee rather than the employer. This means that unused contributions can roll over to the next year and still belong to the employee, even if he or she switches jobs.

HSAs also allow employees to earn tax-free interest on the contributed amount. FSAs don’t earn interest.

Finally, HSAs offer higher contribution limits for a larger variety of expenses than FSAs do.

The Bottom Line

On the face of it, HSAs seem to be a better benefit option for employees. With higher interest-earning amounts and greater portability, employees tend to opt for HSAs.

However, since HSA eligibility guidelines require individuals to enroll in a high-deductible health plan, many employers still offer both HSA and FSA plans. FSAs allow employees to pay for medical expenses including paying for hearing aids, diabetes supplies, and even summer camps.

NY Small Health can help you discover which health benefits plans will best meet the needs of your small business and employees. Contact an insurance expert to learn more.

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