As we approach the 2025 plan year, the IRS has announced an increase in the maximum contribution limits for Flexible Spending Accounts (FSAs). This change provides employees with a valuable opportunity to save more pre-tax dollars for eligible healthcare and dependent care expenses. Let’s dive into what these new limits mean, how FSAs work, and how you can take full advantage of these benefits in 2025.
What is an FSA?
A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax income to cover qualified medical, dental, vision, and dependent care expenses. FSAs are popular because they offer significant tax savings, reducing both the employee’s and employer’s tax burden. However, FSAs do come with an annual contribution limit, which can impact budgeting for out-of-pocket medical expenses.
2025 Contribution Limits: What’s New?
For the 2025 plan year, the IRS has increased the maximum FSA contribution limits. Here’s a quick look at the new limits for each type of FSA:
- Healthcare FSA: $3,300
- Rollover Amount: $660.00
- Dependent Care FSA: $5,000
These new limits reflect the IRS’s adjustment for inflation and its goal to help employees keep up with rising healthcare and dependent care costs.
Why the Increase Matters
With rising costs in healthcare and dependent care, the new contribution limits offer more flexibility and savings potential. By contributing the maximum amount allowed, employees can set aside more pre-tax dollars to cover a wide range of eligible expenses, which can include:
- Healthcare FSA: Doctor visits, prescription medications, mental health services, dental care, vision expenses, and much more.
- Dependent Care FSA: Daycare, after-school care, elder care, and other expenses that allow employees to work or attend school.
Benefits of Contributing to an FSA
- Tax Savings: Contributions to FSAs are deducted from gross income, which lowers taxable income and can lead to significant tax savings for employees and employers alike.
- Predictable Healthcare and Dependent Care Budgets: FSAs provide employees with a pre-set amount to use on eligible expenses, helping families budget more effectively for out-of-pocket costs.
- Yearly Rollover and Grace Periods: Many FSAs now offer either a rollover option, allowing a portion of unused funds to carry over to the next plan year, or a grace period, which extends the time to use funds. Check with your employer to see which option is available.
How to Maximize Your FSA in 2025
- Review Your Expenses: Look at your typical healthcare and dependent care expenses from previous years to estimate how much you’ll need.
- Contribute the Maximum if Possible: By contributing the maximum allowed, you maximize your tax savings and ensure funds are available when you need them.
- Plan Ahead for Eligible Expenses: Schedule routine medical appointments, consider elective procedures, or budget for larger dependent care costs in advance.
- Monitor Account Balances: Regularly check your account balance to ensure you’re using funds effectively throughout the year.
Key Takeaways
With the new FSA contribution limits for 2025, employees have an even better opportunity to save on healthcare and dependent care expenses. Make the most of your FSA by planning your contributions carefully and staying informed about eligible expenses and any rollover or grace period options available.
If you have any questions, please don’t hesitate to email me at martha.barker@letscatapult.org.
