It is known that emotional facial expressions modulate the perception and subsequent recollection of faces and that aging alters these modulatory effects. Yet, the underlying neural mechanisms are not well understood, and they were the focus of the current fMRI study. We scanned healthy young and older adults while perceiving happy, neutral, or angry faces paired with names. Participants were then provided with the names of the faces and asked to recall the facial expression of each face. fMRI analyses focused on the fusiform face area (FFA), the posterior superior temporal sulcus (pSTS), the OFC, the amygdala (AMY), and the hippocampus (HC). Univariate activity, multivariate pattern (MVPA), and functional connectivity analyses were performed. The study yielded two main sets of findings. First, in pSTS and AMY, univariate activity and MVPA discrimination during the processing of facial expressions were similar in young and older adults, whereas in FFA and OFC, MVPA discriminated facial expressions less accurately in older than young adults. These findings suggest that facial expression representations in FFA and OFC reflect age-related dedifferentiation and positivity effect. Second, HC–OFC connectivity showed subsequent memory effects (SMEs) for happy expressions in both age groups, HC–FFA connectivity exhibited SMEs for happy and neutral expressions in young adults, and HC-pSTS interactions displayed SMEs for happy expressions in older adults. These results could be related to compensatory mechanisms and positivity effects in older adults. Taken together, the results clarify the effects of aging on the neural mechanisms in perceiving and encoding facial expressions.