Definition
An employer-sponsored tax-advantaged account that allows employees to set aside pre-tax dollars to pay for eligible healthcare expenses or dependent care costs, subject to annual contribution limits and use-it-or-lose-it rules.
UK Context
Best Practices
- Educate employees on the use-it-or-lose-it rule and help them estimate annual expenses to avoid forfeiture
- Decide whether to offer a rollover or grace period provision and communicate the choice clearly
- Process FSA claims promptly and provide employees with regular balance statements
- Conduct non-discrimination testing annually to ensure the plan does not favour highly compensated employees
Frequently Asked Questions
What happens to unused FSA funds?
Under the use-it-or-lose-it rule, unused funds are forfeited at the end of the plan year. Employers may offer a rollover (up to $640 for 2024) or a 2.5-month grace period, but not both. Employees should carefully estimate their annual expenses to minimise forfeiture.
Can I have both an FSA and an HSA?
Generally no — a standard Healthcare FSA disqualifies you from HSA eligibility. However, a Limited-Purpose FSA (covering only dental and vision expenses) or a Post-Deductible FSA (available after the HDHP deductible is met) can be paired with an HSA.
What expenses qualify for Healthcare FSA reimbursement?
Eligible expenses include medical copays, deductibles, prescription drugs, dental work, orthodontia, vision care including glasses and contacts, and certain over-the-counter items including menstrual products. Cosmetic procedures and health club memberships generally do not qualify.