Health Flexible Spending Accounts (FSAs) remain one of the most valuable tools for employees to save money on out-of-pocket medical expenses using pre-tax dollars. With the IRS announcing annual inflation-adjusted updates, the contribution cap for employee health FSAs has been raised to $3,300 for the 2025 tax year. In addition, the carryover limit for unused funds has been increased to $660.
This blog provides a comprehensive explanation of what FSAs are, the benefits of participation, eligibility rules, and what these updated limits mean for employees and employers alike.
What Is a Health Flexible Spending Account (FSA)?
A Health FSA is an employer-sponsored benefit that allows employees to contribute pre-tax earnings to an account used to pay for qualified medical, dental, and vision care expenses. These accounts reduce an employee’s taxable income and help manage healthcare costs not covered by insurance.
Examples of eligible FSA expenses include:
- Co-pays and deductibles
- Prescription medications
- Medical equipment and supplies
- Dental cleanings and orthodontics
- Eyeglasses and contact lenses
FSAs are subject to annual contribution caps and “use-it-or-lose-it” rules, which make planning essential for maximizing their benefit.
2025 Health FSA Contribution Limit: $3,300
The IRS has increased the annual contribution limit for health FSAs to $3,300 per employee in 2025, up from $3,050 in 2024. This increase reflects inflation adjustments and provides more tax-free savings opportunities for employees.
This means an employee can set aside up to $3,300 in pre-tax earnings to cover qualified healthcare expenses incurred during the plan year. If both spouses work and each has access to an FSA through their employer, they may each contribute up to the full amount to their individual FSAs.
Carryover Limit Increased to $660
In addition to raising the annual cap, the IRS also increased the carryover limit for unused FSA funds to $660 for the 2025 plan year. This carryover provision allows employees to roll over a portion of unused FSA funds into the next plan year without forfeiting them.
Key details of the carryover rule include:
- The carryover applies only if the employer plan permits it
- Carryover funds do not reduce the contribution limit for the next plan year
- Unused amounts above the carryover threshold are forfeited unless used within the plan’s grace period (if applicable)
Employers can offer either a carryover or a grace period of up to 2.5 months—but not both.
How FSAs Work
Health FSAs operate on an annual election basis, meaning employees choose how much to contribute for the upcoming plan year during open enrollment. The elected amount is deducted from paychecks on a pre-tax basis throughout the year.
Key features include:
- Funds are available on day one: The entire elected amount is accessible at the start of the plan year
- Pre-tax savings: Contributions are not subject to federal income tax, Social Security, or Medicare taxes
- Reimbursement model: Employees pay for eligible expenses out of pocket and submit claims for reimbursement
Employers may also contribute to employee FSAs, though total contributions (employee + employer) must not exceed the annual IRS cap.
Eligible and Ineligible Expenses
The IRS defines a wide range of qualified medical expenses under IRC Section 213(d). Some eligible items include:
- Office visit co-pays and coinsurance
- Hospital expenses
- Prescription drugs
- Chiropractic care
- Smoking cessation programs
- Menstrual care products
- Over-the-counter drugs (no prescription needed since the CARES Act)
Ineligible items include:
- Cosmetic surgery
- Teeth whitening
- Gym memberships (unless prescribed for a medical condition)
- Vitamins and supplements (unless medically necessary)
Who Can Participate?
Health FSAs are generally available to employees whose employers offer them as part of a cafeteria or Section 125 plan. Eligibility typically requires:
- Employment status (full-time or part-time as defined by employer)
- Enrollment during open enrollment or following a qualifying life event
- Not being enrolled in a High Deductible Health Plan (HDHP) with a Health Savings Account (HSA) simultaneously
Unlike HSAs, FSAs are not individually owned accounts and are not portable between employers.
Use-It-or-Lose-It Rule
Health FSAs are subject to the “use-it-or-lose-it” rule, meaning unused funds are forfeited at the end of the plan year unless:
- The plan offers a carryover provision (up to $660 in 2025)
- The plan allows a 2.5-month grace period to use remaining funds
It’s critical for participants to plan annual contributions carefully based on expected healthcare needs to avoid forfeiture of unused funds.
Benefits of Using an FSA
There are numerous financial and practical advantages to enrolling in a Health FSA:
- Tax savings: Reduces taxable income, saving on federal and payroll taxes
- Upfront access: Total elected amount is available at the beginning of the year
- Budgeting tool: Helps manage out-of-pocket health expenses
- Employer contributions: Some employers match or contribute to FSA funds
These features make FSAs one of the most efficient tax-advantaged benefits in a typical employee benefit package.
Administrative Requirements for Employers
Employers offering FSAs must follow specific compliance rules under the IRS and ERISA, including:
- Providing plan documents and notices
- Handling claims and reimbursements
- Managing forfeitures and carryovers or grace periods
- Reporting contributions on employee W-2s (Box 10)
Third-party administrators (TPAs) often assist with FSA plan management and regulatory compliance.
Conclusion
The 2025 updates to the Health FSA—raising the contribution cap to $3,300 and increasing the carryover limit to $660—enhance the value and flexibility of this popular benefit. These changes reflect inflation and give employees more tax-free dollars to manage rising healthcare expenses.
To make the most of your FSA in 2025:
- Estimate your healthcare needs carefully during open enrollment
- Use all funds before year-end or ensure you can carry over up to $660
- Keep receipts and documentation for all FSA claims
- Ask your HR team about your employer’s specific FSA rules and deadlines
Whether you’re managing a family’s medical budget or preparing for planned dental or vision work, a Health FSA offers a smart way to lower your tax bill while paying for everyday care. Plan ahead and take full advantage of the expanded 2025 limits.
