On October 22, 2024, the IRS announced that the limit on employees’ salary reduction contributions to a health Flexible Spending Account (FSA) will increase to $3,3000 for plan years beginning in 2025. This is an increase from the 2024 limit of $3,200. By understanding the latest contribution limits, individuals can better plan for 2025 and see how the new limits can enhance tax savings.
What is an FSA?
An FSA is a tax-advantaged savings account that allows you to set aside pre-tax dollars to pay for eligible medical expenses. This can help you save money on your tax bill and reduce your out-of-pocket healthcare costs.
Key Points to Remember:
- Use It or Lose It: Generally, any unused funds in your FSA at the end of the year are forfeited.
- Qualified Expenses: Eligible expenses include doctor visits, prescription medications, dental care, and more.
- Employer Contributions: Some employers may offer additional contributions to your FSA.
How to Maximize Your FSA Benefits:
- Plan Ahead: Estimate your annual healthcare costs and adjust your FSA contributions accordingly.
- Use Your FSA Wisely: Keep track of your expenses and use your FSA funds throughout the year.
- Check for Grace Periods and Carryover Rules: Some plans offer grace periods or allow you to carry over unused funds to the next year.
Why Are FSA Contribution Limits Higher for 2025?
FSAs offer significant tax savings by letting individuals use pre-tax dollars for eligible medical expenses like copayments, deductibles, and prescription or over-the-counter medications. With the new 2025 limit of $3,300, participants can allocate even more toward healthcare costs, reducing their taxable income.
For FSAs that permit unused funds to carry over, the maximum carryover has risen to $660, which represents 20% of the new FSA limit. This adjustment aligns with the increased contribution cap, providing greater flexibility for managing healthcare costs from year to year.
