Starting in 2025, the Internal Revenue Service (IRS) is increasing contribution limits for flexible spending arrangements (FSAs) and healthcare savings accounts (HSAs). This adjustment provides a valuable opportunity for workers to save more for medical expenses while enjoying tax benefits. Let’s look into what these changes mean, the updated limits, and how you can make the most of these accounts.
FSAs and HSAs
FSAs (Flexible Spending Arrangements) allow employees to set aside pre-tax dollars to cover qualified medical expenses. These accounts are employer-sponsored and offer a tax-efficient way to pay for healthcare costs. However, FSAs come with a “use-it-or-lose-it” rule, limiting how much money can be carried over to the next year.
HSAs (Health Savings Accounts) work similarly but are tied to High Deductible Health Plans (HDHPs). HSAs allow you to save pre-tax dollars for medical expenses, but they offer more flexibility in rolling over unused funds. However, you cannot have both an FSA and HSA simultaneously.
Updated Contribution Limits
The IRS has raised the contribution limits for FSAs in 2025 to $3,300, up from $3,200 in 2024. If your spouse has an employer-sponsored FSA, they can also contribute up to $3,300, allowing a household to save up to $6,600 annually.
Carryover Limits
The maximum amount you can carry over from unused FSA funds has also increased, rising from $640 in 2024 to $660 in 2025. Any unused funds beyond this limit will be forfeited.
| Year | FSA Contribution Limit | Carryover Limit |
|---|---|---|
| 2024 | $3,200 | $640 |
| 2025 | $3,300 | $660 |
Key Considerations
- Employer Participation: FSAs are only available through employer-sponsored plans, making them inaccessible to self-employed individuals. If your employer does not offer an FSA, consider an HSA if you qualify for a High Deductible Health Plan.
- Qualifying Expenses: You can use FSA funds for a variety of expenses, including:
- Deductibles and co-pays
- Medical equipment and supplies
- Prescription eyeglasses
- Dental care
- Dependent care for children or elderly family members
- “Use-It-or-Lose-It” Rule: Be mindful of the carryover limit. Unused funds exceeding the limit will be forfeited to your employer.
Avoiding Penalties
If you exceed the FSA contribution limit, the IRS imposes penalties:
- Regular income tax on the excess amount
- A 6% penalty tax on the overage
To avoid penalties, monitor your contributions carefully. If you notice an excess contribution before the federal tax filing deadline, withdraw the excess funds to remain compliant. This way, you’ll only pay the regular income tax, without additional penalties.
Maximizing Your Benefits
- Plan Expenses: Anticipate your healthcare needs for the year to allocate FSA funds wisely.
- Track Usage: Regularly monitor your FSA account to avoid losing funds or exceeding limits.
- Use Employer Resources: Take advantage of any educational tools or support your employer provides to understand FSA benefits fully.
By knowing these updates and managing your contributions wisely, you can save more and reduce your healthcare-related financial burdens.
FAQs
What is the new FSA contribution limit for 2025?
The limit is $3,300 per person, up from $3,200 in 2024.
Can unused FSA funds be carried over?
Yes, up to $660 in 2025, compared to $640 in 2024.
What expenses can FSA funds cover?
They cover deductibles, co-pays, prescriptions, and dependent care.
What happens if I exceed the FSA limit?
You’ll pay income tax and a 6% penalty on the excess amount.
Can self-employed individuals open an FSA?
No, FSAs are only available through employer-sponsored plans.
