Flexible Spending Account (FSA) Benefits from Paychex

FSA participants can pay for eligible items or services with an FSA debit card or get reimbursed by submitting proof of expenses.

Participants cannot use their FSA accounts for some items, such as:

• Cosmetic surgeries provided for reasons other than correcting congenital deformities, disease disfigurement, or to correct personal injuries that result from accidents or trauma
• Childbirth class expenses for the coach (those for the expectant mother are covered)
• Exercise equipment for general wellbeing
• Marriage counseling

This is not comprehensive list, so be sure to check which items are eligible.

Health care FSAs cover over-the-counter drugs and remedies. Some examples of FSA-eligible items include:

• Indigestion medications
• Eye drops
• Laxatives
• Pain relievers
• Sleep aids
• Acne medications
• Diaper rash ointment
• Ointments for minor injuries

If you wish to offer employees an FSA account plan, the timing of your decision is imperative. Ideally, your new FSA should be ready to go before the following year's open enrollment. This will allow employees to do their research and make their plan elections accordingly. If you currently offer an FSA and need to amend your plan, be sure to communicate any changes to participants.

Although not required, employers have two options they can institute to help employees take advantage of all the money they’ve contributed to their healthcare or limited purpose FSAs.

• Allow employees to carry over up to $660 of unused health FSA money in 2025 at the end of the year to apply to the next plan year (remaining funds in excess of $660 are still forfeited to the plan); or
• Elect a grace period to permit employees to use their unused account balances to pay for medical costs incurred during the first 2.5 months of the following plan year (up to March 15 for calendar year plans) before they must forfeit the money.

Before making a final decision, employers should carefully weigh health care or limited purpose FSA benefits or any insurance benefit account and understand the administrative requirements of a carryover or grace period option.

Both options are intended to reduce “wasteful” end-of-year spending as employees hurry to spend their health care or limited purpose FSA accounts rather than lose the money. Employers are not required to offer either option, in which case the “use it or lose it” rule will still apply. But if you offer one of these options to your workforce, you must pick only one, as employers cannot allow employees both a carryover and a grace period for the health or limited purpose FSA.

You may wish to review any available data on current FSA utilization before deciding which option would work best for your company’s workforce. Once you make your selection, notify employees as soon as possible to give them enough time to make an account selection and adjust their medical spending as needed.

Communication efforts about an FSA should be easy to understand and designed to educate employees on the advantages of this benefit account. An FSA quick reference guide listing common items employees can use their FSA funds to pay for is also helpful. You can also provide commonly asked questions, key enrollment dates, and examples that break down different cost scenarios. You'll also want to remind employees about any FSA spending deadlines and clearly explain the carryover or grace period options made available to them, including specific dates and deadlines.

If you're not currently offering an FSA, this can bring tax savings for both you and your employees and provide a much-desired add-on to your health benefits. Paychex offers assistance with FSA implementation, ongoing administration, and the development of employee communications to encourage participation.

To create a robust employee benefits strategy and maintain compliance, it is imperative to factor in flexible spending account employer rules. To start, employers should understand IRS guidelines and create a clear plan that outlines the terms, eligibility criteria, and limitations of their FSA accounts. Communicate aspects such as eligible expenses and FSA employer contribution limits to employees so everyone is on the same page. Also, file the required forms, perform periodic audits, and confirm dependent eligibility when necessary.

Yes, an FSA for small business owners is possible. Consider if the benefits of an FSA account align with your priorities and are something you want to offer employees. If these things align, a benefits broker or an FSA provider for small businesses can help you provide this to employees, allowing them access to affordable healthcare and tax savings.