2025 Limits for Flexible Spending Accounts

Flexible Spending Accounts (“FSAs”) are an essential tool in the world of employee benefits, allowing individuals to set aside pre-tax dollars for qualifying healthcare and dependent care expenses. For both employers and employees, FSAs offer significant advantages in managing healthcare costs and saving money on taxes.

What is a Flexible Spending Account?

FSAs are a tax-advantaged savings account offered through employers that allows employees to set aside a portion of their income, before taxes, to pay for qualified medical expenses and, in some cases, dependent care expenses. This account helps reduce taxable income while covering out-of-pocket healthcare costs such as copayments, prescriptions, and medical equipment.

How Flexible Spending Accounts Work

FSAs are funded through voluntary payroll deductions, and the money is available to use for eligible expenses as soon as the plan year begins, regardless of how much you’ve contributed at that point. Employees choose how much they want to contribute up to the IRS maximum for that year, and the funds are deducted in equal amounts from their paychecks throughout the year.

Once funds are in the account, they can be used for a variety of qualified healthcare expenses, such as:

• Prescription medications
• Medical supplies (like bandages or first-aid kits)
• Copays and deductibles for doctor’s visits
• Dental and vision care
• Over-the-counter medicines (with a prescription)

Dependent Care FSAs (“DCFSA”), a separate type of FSA, allow employees to cover eligible dependent care expenses, including childcare and elder care.

Key Facts About FSAs

• Tax Savings: Since FSA contributions are made pre-tax, they reduce an employee’s taxable income, leading to tax savings for both the employee and the employer.
• Use It or Lose It: Traditionally, FSAs have had a “use it or lose it” policy, meaning any unused funds at the end of the plan year are forfeited. However, recent rule changes provide some flexibility (explained below).
• Eligible Expenses: FSA funds can only be used for IRS-approved healthcare or dependent care expenses, and misusing the funds can result in penalties.
• Non-transferable: FSAs are owned by the employer, not the employee, meaning funds typically cannot be transferred to a new employer.

2025 Contribution Limits

For the 2025 tax year, the IRS sets limits on how much an employee can contribute to their FSA:

• Healthcare FSA: The maximum contribution limit is $3,300.

• Dependent Care FSA: The contribution limit is $5,000 per household ($2,500 for married individuals filing separately).

Grace Periods and Carryover Rules

To mitigate the “use it or lose it” concern, many employers offer either a grace period or a carryover option for unused FSA funds. However, an employer can choose to offer one of these, but not both.

• Grace Period: Employers can allow a grace period of up to 2.5 months after the end of the plan year for employees to use any remaining FSA funds. For example, if your plan year ends on December 31, you would have until March 15 of the following year to spend leftover money.
• Carryover: Employers may also offer a carryover option, which allows employees to roll over up to $660 of unused FSA funds into the next plan year. This option gives a bit more flexibility to participants, helping them avoid forfeiting unused funds at the end of the year.

Choosing the Right FSA Strategy

When deciding how much to contribute to an FSA, it’s essential to carefully estimate your expected out-of-pocket healthcare or dependent care expenses. You want to maximize your tax savings without contributing more than you’ll realistically use. Consider reviewing your medical history, upcoming procedures, or regular prescriptions to estimate your annual costs.

Conclusion

Flexible Spending Accounts offer a great opportunity to save money on healthcare and dependent care expenses by reducing taxable income. Understanding how to maximize FSA benefits through careful planning and awareness of limits and rules, such as grace periods and carryovers, is key to making the most of this valuable employee benefit.