GBS Health & Benefits Compliance
2025 Health FSA Contribution Limit
On October 22, 2024, the IRS issued Revenue Procedure 2024-40 (Rev. Proc. 24-40), which provides the updated limit on employee salary reduction contributions to health flexible spending accounts (FSAs) for the 2025 plan year. The new limit for pre-tax employee contributions to health FSAs will rise to $3,300, representing a $100 increase from the 2024 limit of $3,200.
Under the Affordable Care Act (ACA), a cap is placed on the amount employees can contribute to health FSAs through salary reductions. This cap initially started at $2,500 for plan years beginning on or after January 1, 2013, and has been adjusted annually for inflation. For the 2025 plan year, employers must ensure their health FSAs do not allow pre-tax contributions to exceed $3,300, although employers have the option to set a lower limit.
Employers should review their plan documents to confirm the 2025 contribution limit is accurately reflected and clearly communicated to employees during the open enrollment period.
Pre-tax Contributions
The ACA’s contribution limit applies specifically to employee pre-tax salary reduction contributions to health FSAs. Employer contributions that are nonelective, such as matching contributions or flex credits, typically do not count toward the health FSA contribution limit. However, if employees have the option to receive these employer contributions as taxable benefits or cash, they will be considered salary reductions and therefore count toward the FSA limit.
Individual Contribution Limit
The health FSA limit is applied on an individual basis, meaning each employee can contribute up to $3,300 through salary reductions in 2025, regardless of whether family members also use the funds. However, if family members are individually eligible to participate in a health FSA, they each have their own separate contribution limit. For instance, a married couple could each elect to contribute up to $3,300 to their respective health FSAs, subject to any lower limits imposed by their employers.
Health FSA Carryovers
As an exception to the traditional “use-it-or-lose-it” rule, employers may allow employees to carry over a portion of unused FSA funds into the next plan year. This carryover amount is adjusted annually for inflation. For 2025, Rev. Proc. 24-40 increases the maximum carryover limit to $660, up from $640 in 2024. Employers that offer carryovers can set their own limit, provided it does not exceed the maximum allowable amount.
Key Points
- The maximum health FSA contribution limit will increase to $3,300 for plan years starting in 2025.
- Employers may set a lower contribution limit, but it cannot exceed the ACA’s maximum.
- Employers should communicate the updated 2025 limits to employees during the open enrollment process.
- The health FSA carryover limit will increase to $660 for 2025 plan years.
October 2024
This document is not intended to be exhaustive, nor should any information be construed as tax or legal advice. Readers should contact a tax professional or attorney if legal advice is needed. Although we have made every effort to provide complete, up-to-date, and accurate information in this document, such information is meant to be used for reference only. If there is any inconsistency between the information contained in this document and any applicable law, then such law will control.
