There will be numerous changes in 2025, but given the number of people suffering from medical debt, this new Internal Revenue Service (IRS) regulation will most likely be taken into consideration. New contribution restrictions apply to medical savings accounts such as flexible spending arrangements (FSAs) and healthcare savings accounts (HSAs).
Employer-sponsored FSAs are savings accounts that allow you to set aside money for qualified medical bills or products. The money is removed from your payroll before taxes, so you can save more, but you may be required to pay taxes on it later.
HSAs also allow you to save money before taxes for qualified medical expenses, but you can only contribute to an HSA if you have an HSA-eligible plan (also known as a High Deductible Health Plan (HDHP), which is a health plan that only covers preventative care before the deductible.
These accounts are an excellent resource for many workers to invest in their future, which is why the IRS has doubled the allowable contributions. However, keep in mind that if you exceed the contribution limitations, you may suffer financial penalties. Remember that you cannot have both of these accounts at the same time. To simplify, we’ll talk about the FSA, but the constraints apply to both.
New FSA limits for 2025
In 2024, the FSA contribution ceiling was $3,200; in 2025, it was raised to $3,300. In addition, if your spouse has an employer-sponsored plan, they may contribute up to $3,300 through payroll deductions in 2025, bringing the total joint household contribution to $6,600.
Because these accounts are intended to cover certain out-of-pocket health care costs for you, your spouse, and your dependents, they should not be ignored. This means that there is a maximum amount of money that can be carried over from one year to the next.
In 2024, the maximum carryover of unused funds was $640, and in 2025, it will be $660. If you do not spend all of the money in your FSA by the end of the year, save for the carryover amount, you will forfeit the remainder to your employer.
Self-employed taxpayers cannot use these accounts because they are employer-sponsored. Employers are not required to provide them, so you may need to save for qualified medical expenses in another method, such as a health savings account (HSA) if you are covered by a high deductible health plan.
The contribution levels and tax deductions will remain the same, as will the qualifying expenses, making it a method to increase your access to healthcare.
According to the IRS, the qualifying expenses include (but are not limited to):
- Deductibles, co-pays, or medical appointments
- Medical equipment and supplies such as bandages and diagnostic devices.
- Prescription eyeglasses and dental work.
- You can also use your FSA funds to pay for dependent care expenses for your child or elder care, that are not covered by your insurance.
IRS penalties for making excess contributions
You can technically contribute more to your FSA account, but if you exceed the contribution threshold, you must pay regular income taxes on the amount over the limit. As a penalty, any sum exceeding the contribution limit will be subject to an additional 6% tax.
An easy strategy to avoid paying the additional tax is to notify the excess contribution before the federal tax filing deadline and remove the monies. The account will then be in compliance with the requirements, and no additional taxes will be levied on the funds, only the usual income tax that would have been imposed otherwise.