FSA 101: A Comprehensive Guide for Brokers and Employers

4/7/25

Flexible Spending Accounts (FSAs) are powerful tools that allow employers to offer their employees a valuable benefit while also enjoying potential tax savings. In this guide, we’ll explore what FSAs are, how they work, and why offering them to your workforce is a smart move. We’ll also discuss the key features and benefits of FSAs and introduce Lifetime Benefit Solutions (LBS) as an ideal partner for brokers and employers looking to optimize their FSA offerings.

What is an FSA?

An FSA is a benefit plan established under the Internal Revenue Code that allows employees to use pre-tax dollars to pay for certain qualified expenses. FSAs can be used to cover a wide range of health-related and dependent care costs, reducing the taxable income of employees while providing a valuable benefit. For employers, offering a FSA can help lower payroll taxes, increase employee satisfaction, and give you a competitive edge in attracting and retaining talent.

Types of FSAs

At the core of a FSA is the flexibility it offers. Employers can choose from various types of FSAs to meet the diverse needs of their workforce. Below are the most common FSA types:

1. Health Care FSA

A Health Care FSA helps employees manage the rising costs of medical care. With this type of FSA, employees can use pre-tax dollars to pay for out-of-pocket costs for medical expenses that are not reimbursable by insurance, such as:

  • Copayments
  • Deductibles
  • Coinsurance
  • Dental services
  • Perscription drugs
  • Vision services

This plan provides employees with the flexibility to save for a variety of health-related costs, making it an essential offering for employers focused on employee well-being.

2. Dependent Care FSA

The Dependent Care FSA allows employees to pay for qualifying dependent care expenses. This type of FSA helps employees maintain a work-life balance by covering expenses such as:

  • Daycare centers
  • Babysitters
  • Caregivers

For parents and guardians, this FSA helps offset the financial burden of dependent care, allowing them to stay focused and productive at work.

3. Limited Purpose FSA

For employees enrolled in a Health Savings Account (HSA), a Limited Purpose FSA can be a beneficial option. This account is limited to covering dental and vision expenses, including:

  • Dental and vision provider visits (copayments, deductibles, coinsurance)
  • Orthodontia
  • Dental X-rays
  • Contact lenses
  • Eye surgery

The Limited Purpose FSA allows employees to maximize their savings by using pre-tax dollars for vision and dental care while maintaining HSA eligibility for other medical expenses.

How FSAs Benefit Employers

Offering FSAs provides several key advantages for employers, including:

  • Tax Savings: Employers save money on payroll taxes by reducing taxable income for employees who elect to contribute to an FSA. These savings can add up significantly over time.
  • Attracting Talent: Providing FSAs as part of a comprehensive benefits package helps employers stand out to potential hires, particularly those looking for ways to reduce their out-of-pocket healthcare costs.
  • Increased Employee Satisfaction: FSAs give employees a sense of financial security and control over their healthcare and dependent care costs. When employees feel valued, they are more likely to be engaged and loyal.

Key Considerations for Brokers and Employers

1. Enrollment and Election Periods

Typically, employees can only elect to participate in a FSA during open enrollment, but certain life events may trigger a qualifying event that allows for mid-year changes. Examples include:

  • Marriage or divorce
  • Birth or adoption of a child
  • A change in employment status

Employers should be clear about these eligibility rules and help employees understand how they can make changes when necessary.

2. Contribution Limits and Carryover Options

Each year, the IRS sets contribution limits for FSAs. It’s crucial for both employers and employees to understand how these limits work. Typically, employees must use the funds by the end of the plan year, or any unused money may be forfeited. However, employers have options to provide flexibility: they can allow a carryover of a portion of unused funds into the next plan year or offer a grace period, which gives employees additional time to spend their remaining balance.

Employers should ensure that employees calculate their contributions carefully to maximize their benefits while minimizing the risk of forfeiting funds. Understanding and utilizing these options can help employees make the most of their FSA dollars.

3. Administering an FSA

Administering FSAs can be complex, but the right solution makes it simple. A good FSA program should offer:

  • Easy enrollment and contribution management: Streamlined processes that allow employees to enroll and set their contributions during open enrollment or after a qualifying life event.
  • Access to funds: Employees should have convenient access to their FSA funds via a card, mobile app or online account. This makes it easier for them to pay for eligible expenses quickly.
  • Seamless claims process: A user-friendly process for submitting and tracking claims is essential to keep employees happy and engaged with their benefits.

Why Partner with LBS?

Offering an FSA can be an overwhelming task for brokers and employers without the right support. That’s where LBS can help. With a comprehensive, integrated platform, LBS makes managing FSAs easy and efficient for both employers and employees.

Here’s what LBS offers:

  • Three Diverse FSA Options: Whether you’re looking to offer health care, dependent care, or a limited purpose FSA, LBS provides a variety of options to suit your employees’ needs.
  • Seamless Integration: LBS integrates FSAs with Health Reimbursement Accounts (HRAs) and Health Savings Accounts (HSAs), allowing employees to manage all their reimbursement accounts in one place.
  • 24/7 Account Access: Online, Mobile App, and Phone: Easily manage your FSA account anytime, anywhere. Access balance, contributions, and claims through our secure online portal, the LBS Health Spending app, or by phone.
  • Paperless Administration: The system offers a virtually paper-free process, including automated alerts and easy-to-read account summaries, helping to save time and reduce administrative burdens.
  • FSA Store Access: Employees can shop the largest selection of FSA-eligible products through the FSA Store and pay directly from their account using the LBS Health Spending Card.

Maximize Employee Benefits with a Seamless FSA Solution

Flexible Spending Accounts are a valuable tool for employers looking to offer a comprehensive benefits package that enhances employee satisfaction while saving on payroll taxes. With the right FSA solution, brokers and employers can make the most of this benefit, giving employees the flexibility they need to cover their medical, dental, vision, and dependent care expenses.

For brokers and employers seeking an easy-to-manage, integrated FSA offering, LBS is the solution. With a robust, user-friendly platform and comprehensive support, LBS simplifies the FSA experience for both employers and employees.

Get Started Today!

Reach out to your LBS sales consultant today to take the first step toward offering your workforce a valuable, tax-advantaged benefit.

Note: These materials are for informational purposes only. Federal and state laws may vary with respect to the legal and/or tax requirements for FSAs. Please consult with your own legal counsel and/or tax advisor for the legal and/or tax requirements that may apply to you or your employees.