This new Internal Revenue Service (IRS) rule will probably be something to think about in 2025, especially since so many people are struggling with medical debt. Flexible spending accounts (FSAs) and healthcare savings accounts (HSAs) now have higher caps on how much you can put into them.
FSAs offered by your employer are ways to save money that let you set money aside for certain medical costs or things. You can save more because the money comes from your paycheck before taxes are taken out. However, you may have to pay taxes on the money later.
You can also put money into an HSA before taxes to pay for qualified medical costs. However, you can only contribute to an HSA if you have an HSA-eligible plan, which is also known as a High Deductible Health Plan (HDHP) and only covers preventive treatments before the deductible.
The IRS has raised the maximum amounts that can be put into these accounts because they are a great way for many workers to save for the future. However, keep in mind that if you go over those limits, you could be fined. Also, keep in mind that you can’t have both of these accounts at the same time. We’ll talk about the FSA to keep things simple, but the limits are the same for both.
Big changes to the FSA for 2025
The most you could put into an FSA in 2024 was $3,200. In 2025, that cap went up to $3,300. Also, if your spouse has an employer-sponsored plan, they can contribute up to $3,300 through payroll deductions in 2025. This means that the total amount of money your family will give in 2025 is $6,600.
They are meant to be used because they pay for some of your out-of-pocket health care costs along with those of your partner, dependents, and you. This means that you can only carry over a certain amount of money from one year to the next. The most that could be carried over from one year to the next was $640 in 2024, and it will be $660 in 2025. If, besides the carryover amount, you don’t spend all the money in your FSA by the end of the year, you will have to give your company the rest of the money.
Because these accounts are funded by employers, taxpayers who are self-employed cannot use them. This is also not something that all companies have to do, so if you have a high deductible health plan (HDHP), you may need to save for qualified medical costs in another way, like an HSA. You will be able to make the same amount of contributions and not have to pay taxes on the same costs. This will make it easier for you to get health care.
The IRS says that the qualifying costs are, but are not limited to:
- Payment plans, co-pays, or doctor visits
- Things like bandages and testing tools that are used in medicine.
- Eyeglasses and dental work with a prescription.
- Other things you can do with your FSA money are pay for child or adult care costs that aren’t covered by your insurance.
The IRS charges fees for making too many donations
Technically, you can put more money into your FSA account, but if you do, you will have to pay regular income taxes on the amount that is over the cap. As a penalty, any amount over the contribution cap will be taxed at a rate of 6%.
Noting the extra gift before the federal tax deadline and taking out the extra funds is an easy way to avoid the extra tax. Then the account will be in line with the rules, and the funds will only be subject to the regular income tax that would have been applied anyway.