FSA Accounts in Texas: How They Work & Benefits for Employers

Flexible Spending Accounts (FSAs) are one of the easiest, lowest-cost benefits a Texas employer can add to a package — and one of the most underused. They let your employees pay for healthcare and dependent care with pre-tax dollars, which lowers their taxable income and trims your company’s payroll-tax bill at the same time. Here’s how FSA accounts work, what the 2026 limits are, and what they mean for Texas businesses specifically.

What Is an FSA (Flexible Spending Account)?

An FSA is an employer-sponsored account that lets employees set aside a portion of their paycheck before taxes to pay for qualified out-of-pocket expenses. Because the money is never taxed, employees keep more of what they earn, and employers save on the matching payroll taxes they would otherwise owe.

FSAs are offered through a Section 125 cafeteria plan, the IRS framework that makes pre-tax employee benefits possible. The account is owned and set up by the employer, funded by employee salary reductions, and governed by federal rules — not state ones (more on what that means for Texas below).

Prefer to watch? Here’s a quick 3-minute overview of how FSAs work:

Types of FSAs Texas Employers Can Offer

There are three main types, and an employer can offer more than one:

1. Health FSA

The most common type. Employees use it for qualified medical, dental, and vision costs — copays, deductibles, prescriptions, eligible over-the-counter items, glasses, and contacts. For 2026, employees can contribute up to $3,400 per person.

2. Dependent Care FSA (DCFSA)

Covers childcare or adult-dependent care that allows the employee (and their spouse) to work — daycare, preschool, after-school programs, and some eldercare. For 2026, the limit is $7,500 per household ($3,750 if married filing separately) — the first permanent increase since 1986, raised from the long-standing $5,000 under the One Big Beautiful Bill Act.

One caveat for employers: that full $7,500 isn’t automatically available to everyone. Dependent Care FSAs are subject to nondiscrimination testing, and because the largest contributions tend to come from highly compensated employees, plans can struggle to pass the IRS 55% average benefits test. If the plan fails, the benefit can become taxable for those highly compensated employees. For some workers, the enhanced federal dependent care tax credit may be the better choice — so it’s worth helping employees weigh both options at enrollment.

3. Limited-Purpose FSA (LPFSA)

Restricted to dental and vision expenses and designed to pair with an HSA-qualified high-deductible health plan. It shares the same 2026 limit as the health FSA: $3,400. This lets employees use HSA dollars for medical care while tapping the LPFSA for dental and vision.

How FSA Accounts Work

The mechanics are simple on both sides:

• Employees elect an annual amount during open enrollment, and that amount is deducted from their paychecks in equal pre-tax installments across the year.
• The full health FSA balance is available on day one. An employee who elects $3,400 can spend the whole amount in January, even though they’ve only contributed one paycheck’s worth — the employer fronts the rest.
• Most plans include a debit card so employees can pay providers directly at the point of sale.
• Elections are locked for the plan year. Employees can only change their contribution during open enrollment or after a qualifying life event such as marriage, divorce, or the birth of a child.

What FSA Funds Can & Can’t Cover

The most common question employees ask is what they can actually spend FSA dollars on. A health FSA covers a wide range of medical, dental, and vision costs — but not everything qualifies under IRS rules.

When in doubt, employees should check their plan’s eligible-expense list or ask the plan administrator before they buy.

2026 FSA Contribution Limits

The health FSA limit applies per employee, not per household — so if both spouses have access to an FSA at their own jobs, each can contribute the full $3,400. The dependent care limit, by contrast, is a single per-household cap, no matter how many parents are working.

These figures come straight from the IRS’s official 2026 inflation adjustments.

The “Use-It-or-Lose-It” Rule — and the Two Ways Around It

Traditionally, any money left in a health FSA at the end of the plan year is forfeited. The IRS gives employers two options to soften that rule, but you can only choose one:

• Carryover: Let employees roll up to $680 of unused funds into the next plan year (2026 limit). Carried-over money doesn’t count against the next year’s contribution cap.
• Grace period: Give employees an extra 2½ months after the plan year ends to spend down their balance.

Many plans also include a run-out period — typically a few months — during which employees can still submit claims for expenses they incurred during the plan year. Encouraging employees to estimate carefully at enrollment is the best way to avoid forfeitures.

Why Texas Employers Offer FSAs

For a relatively small administrative lift, FSAs deliver real value:

• Payroll-tax savings for the company. Every dollar an employee diverts into an FSA is a dollar you don’t pay the 7.65% FICA match on. Across a team, that adds up quickly and often offsets the cost of administering the plan.
• A more competitive benefits package. FSAs pair naturally with group health and other employee benefits, making your offer more attractive when you’re competing for skilled workers.
• Better recruiting and retention. Pre-tax savings on predictable expenses like prescriptions, dental work, and childcare are a perk employees notice in every paycheck.

A Texas-Specific Note on Savings

FSAs are governed by federal IRS rules, so the accounts work exactly the same in Texas as anywhere else — there’s no special “Texas FSA.” But there is a Texas wrinkle worth understanding: because Texas has no state income tax, the savings your employees see come from avoiding federal income tax plus Social Security and Medicare (FICA). Employees in high-income-tax states get an extra state-tax break that Texans don’t — but the federal savings still make FSAs a meaningful bump in take-home pay for your team.

FSA vs. HSA: The Quick Difference

The two are often confused. An HSA requires enrollment in a high-deductible health plan, is owned by the employee, and rolls over fully year to year. An FSA works with almost any plan, is owned by the employer, and has limited rollover. Employees can’t contribute to both a general-purpose health FSA and an HSA at the same time — but a limited-purpose FSA can be paired with an HSA.

How to Add an FSA to Your Texas Benefits Plan

Setting one up is straightforward with the right broker:

• Establish (or amend) a Section 125 plan document.
• Choose a third-party administrator to handle claims, debit cards, and compliance.
• Decide which FSA types to offer and set your contribution limits (you can set caps lower than the IRS maximums).
• Communicate the benefit clearly during open enrollment so employees actually use it.

Medcore Brokerage helps Texas employers design, administer, and roll out FSAs alongside the rest of their benefits package. Get in touch to see whether an FSA is a fit for your team.

Frequently Asked Questions