Short answer: An employer may contribute to an employee’s healthcare FSA, but the total benefit is generally limited to the greater of $500 or a dollar-for-dollar match of the employee’s contribution, subject to IRS Section 125 rules and plan design.
Employers are permitted to contribute to an employee’s healthcare Flexible Spending Account (FSA), but those contributions must comply with Internal Revenue Service rules governing cafeteria plans and nondiscrimination.
For healthcare FSAs offered through a Section 125 cafeteria plan, employer contributions are generally limited so that the total FSA benefit does not exceed the greater of:
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The employee’s elected contribution plus $500, or
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Twice the employee’s elected contribution amount
This means an employer may contribute up to $500 even if the employee contributes less than $500. Once the employee contributes $500 or more, employer contributions are typically limited to a dollar-for-dollar match of the employee’s contribution.
For example, if an employee contributes $300, the employer may contribute up to $500, resulting in a total FSA benefit of $800. If an employee contributes $1,000, the employer may generally contribute up to $1,000, resulting in a total benefit of $2,000.
These limits are the conditions for the health FSA to qualify as an “excepted benefit” under federal regulations, which keeps it exempt from certain Affordable Care Act market reforms. The employer’s plan document controls whether employer contributions are offered at all and how they are structured within these limits.
Because employer contributions can affect nondiscrimination testing and overall plan compliance, employers should ensure their FSA design aligns with applicable IRS guidance.