IRS Announces 2025 Health FSA Maximum

On October 22, 2024, the Internal Revenue Service (IRS) announced the health flexible spending account (FSA) maximum for 2025 as part of Revenue Procedure 2024-40. The maximum employee contribution to health FSAs will be $3,300 for taxable years beginning in 2025, up $100 from 2024.

Employer contributions to health FSAs that are non-elective, such as matching contributions or flex credits, typically don't factor into the contribution limit. Nevertheless, employers should be careful not to overcontribute to employees' health FSAs, as this could risk the FSA losing its status as an excepted benefit. It's important to be aware that if employees have the option to receive employer contributions as cash or a taxable benefit, these contributions will be treated as salary reductions and will count toward the limit.

Health FSA plans are permitted to offer either a grace period or a carryover feature, but not both. Neither of these features affects the maximum employee salary reduction.

A grace period gives an employee an additional two months and 15 days, immediately following the end of a plan year, to incur new expenses. Any amounts remaining at the end of the grace period must be forfeited. Amounts carried over into the grace period do not count toward the annual limit applicable to the following plan year.

The carryover feature allows employees to roll over up to 20% of the maximum salary reduction contribution for that year. Therefore, the maximum that can be carried over to 2026 will be $660 ($3,300 x 20% = $660). The maximum amount that can be carried over from 2024 to 2025 is $640, based on the 2024 maximum contribution of $3,200 ($3,200 x 20% = $640).

Such a carryover does not affect the limit on salary reduction contributions. This means the plan may allow the individual to elect up to $3,300 in salary reductions for 2025 in addition to the $640 that may be carried over from 2024.

Employers are not required to adopt the IRS health FSA maximum and may instead adopt a different maximum limit for the plan year as long as it does not exceed the IRS’s maximum limit. For example, an employer could set its health FSA limit at $2,500 or $3,000. All employers should review what is stated in their plan materials and determine whether an amendment is required.

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The above information does not constitute advice. Always contact your employee benefits broker or trusted adviser for insurance-related questions.