IRS bumps up 2025 FSA contribution limits

I'm excited to share important updates on the newly released 2025 contribution limits for Flexible Spending Accounts (FSAs), along with insights into other tax-advantaged accounts. Especially for employers, benefits plan sponsors, and benefits advisors, this information will help you communicate to your employees and contacts. Understanding the latest contribution limits will help individuals plan for 2025 and determine how the updated limits can help to maximize tax savings.

It's worth noting that this is a general summary intended to educate employers and plan sponsors on the potential effects of government guidance on employee benefit plans. It's not and should not be construed as legal or tax advice. As always, HealthEquity strongly encourages employers and plan sponsors to consult competent legal or benefits counsel for all guidance on how the actions apply in their specific circumstances.

What are the 2025 FSA contribution limits?

On October 22, 2024, the IRS issued the 2025 annual inflation adjustments for many tax provisions of the IRS Code.¹ These adjusted amounts will be used to prepare tax year 2025 returns in 2026. Importantly, the IRS announced an increase for the FSA contribution limit-an inflation-adjusted bump to $3,300. This adjustment is a welcome change, offering individuals more opportunities to set aside pre-tax dollars for qualified medical expenses.

Why are FSA contribution limits higher for 2025?

First, let's recap that FSAs are a great way for individuals to save on taxes by using pre-tax dollars to cover eligible medical expenses, such as copayments, deductibles, and prescription and over-the-counter medications. With the new 2025 contribution limit of $3,300, participants can allocate more funds toward managing their healthcare costs without the burden of additional taxes.

Some FSAs allow for the carryover of unused amounts. If this is the case for your plan, you should know the maximum carryover amount has increased to $660, which is 20% of the new FSA limit. This adjustment aligns with the overall increase and provides more flexibility in managing healthcare spending from one year to the next.

What is the maximum 2025 contribution limit for Dependent Care Assistance Programs (DCAPs)?

For the 2025 tax year, the IRS has maintained the contribution limit for DCAPs at $5,000. Unlike some of the other tax-advantaged accounts, the DCAP limit did not see an increase this year, remaining steady to provide consistency in financial planning for families.

There are adjustments to some of the general tax limits that are relevant to the federal income tax savings under a DCAP. These include the 2025 tax rate tables, earned income credit amounts, and standard deduction amounts. The child tax credit limits are also relevant when calculating the federal income tax savings from claiming the dependent care tax credit (DCTC) versus participating in a DCAP.

DCAPs allow individuals to use pre-tax dollars to pay for eligible dependent care expenses such as daycare, preschool, and after-school programs. Despite no change to the limit, maximizing contributions to this account can still offer substantial tax savings for those incurring dependent care expenses. By keeping this cap unchanged, families can plan their budgets with predictability and continue to benefit from the tax advantages of dependent care expenses effectively.

How did the IRS adjust Commuter benefits for 2025?

The IRS announced slight increases for 2025 Commuter benefits to reflect changes in the cost of living. In 2025, the monthly limit for parking is $325, up from the 2024 amount of $315. Likewise, the transit and vanpooling monthly limit increased to $325.

What are the 2025 maximum amounts for adoption assistance?

The IRS also announced increases in both the adoption assistance exclusion and the adoption tax credit for the year 2025, reflecting the annual adjustments aligned with inflation. These updates are important for families planning to adopt, as they provide enhanced financial support through exclusions and credits on their tax obligations.

In 2025, the maximum exclusion for employer-provided adoption assistance increases to $17,280, compared to $16,810 in 2024. Similarly, the adoption tax credit limit also rises to $17,280, up from the previous year's $16,810. These enhancements mean that families can exclude a larger portion of adoption-related expenses from taxable income and also claim a greater tax credit, effectively reducing the overall cost of adoption.

What are the 2025 contribution limits for Health Savings Accounts (HSAs)?

For HSAs, the 2025 contribution limits increase to $4,300 for individuals and $8,550 for families. These limits offer enhanced opportunities for saving, especially for those who participate in high-deductible health plans (HDHPs). The catch-up contribution for individuals aged 55 and above remains unchanged at $1,000. I discussed this in detail in my post from May, Prepare for 2025 with the increased HSA contribution limits.

How did the IRS update maximum amounts for Excepted Benefit Health Reimbursement Arrangements (EBHRAs)?

An EBHRA offers a beneficial way for employers to assist employees with out-of-pocket healthcare expenses. In 2025, the maximum newly available benefit amount for an EBHRA is $2,150, an increase from the $2,100 limit in 2024. This type of arrangement is separate from an employer's primary health plan and can cover a range of medical expenses without impacting eligibility for other health plans.

What is the increased coverage limit for Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) in 2025?

QSEHRAs provide a flexible benefits solution for small businesses. For the 2025 tax year, the individual coverage limit has increased to $6,350 from $6,150 in 2024. Similarly, the family coverage limit is now set at $12,800, rising from the previous $12,450. QSEHRAs allow small employers to reimburse employees, tax-free, for their health insurance premiums and other qualified medical expenses, aiding in budgeting and healthcare management.

How did the IRS adjust maximum deductible amounts for Archer Medical Savings Accounts (MSAs) in 2025?

MSAs offer individuals a tax-advantaged way to save for medical expenses, specifically through high-deductible health plans (HDHPs). For 2025, the minimum and maximum deductible amounts for qualifying HDHP individual coverage are $2,850 and $4,300, respectively, compared to the $2,800 to $4,150 range in 2024. MSAs provide flexibility for account holders to cover qualifying medical expenses with pre-tax funds, promoting cost-effective healthcare management strategies.

Using the updated information during open enrollment season

These updated limits provide a fantastic opportunity for employers to enhance their benefits offerings and for individuals to make informed decisions about their healthcare spending. It's important for employers to communicate these changes effectively during open enrollment periods to ensure that employees can take full advantage of the tax savings and benefits provided by these accounts.

Beyond numbers, the 2025 contribution limits represent real opportunities for better financial management and savings. By understanding and adjusting contributions in line with these new limits, workers can optimize their tax savings and ensure that they're making the most of their benefits.

Summarizing what the IRS announcement means for 2025 planning

Staying updated with the latest contributions limits can significantly impact financial outcomes. Whether aiming to maximize savings, manage healthcare expenses more efficiently, or simply make informed decisions, understanding these adjustments is key. Let's make 2025 a year of informed financial planning!

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