Flexible spending accounts (FSAs), also known as Section 125 plans, offer employers and employees a valuable way to save on taxes. The most commonly used FSAs are the medical expense FSA and the dependent care FSA.
These plans allow employees to set aside a portion of their pre-tax salary to pay for eligible expenses, such as unreimbursed medical costs, dependent care, adoption-related expenses, and certain insurance premiums. By reducing taxable income, employees save on federal income, Social Security, and Medicare taxes, while employers also benefit by lowering their Social Security matching obligations.
Although sole proprietors, partners, most LLC or LLP members, and individuals owning more than 2% of an S corporation cannot personally participate in FSAs, they can still sponsor plans for their employees and reap payroll tax savings.
Contribution Limits and Carryover Rules
For the 2025 plan year, employees can contribute up to $3,300 to an FSA through payroll deductions, an increase from the $3,200 limit in 2024. Employers can also choose to contribute to employees’ FSAs, and if an employee’s spouse has an FSA through their employer, they can each contribute up to $3,300, allowing a household maximum of $6,600.
If the plan allows, unused FSA funds may be carried over to the following year. The carryover limit will rise to $660 in 2025 (up from $640 in 2024). These carryover amounts do not impact the maximum allowable contribution for the following year.
How to Maximize FSA Benefits
Employees can use their FSA funds throughout the year for a variety of qualified medical expenses not covered by their health insurance. These include deductibles, copays, medical products, and services like dental care, vision exams, eyeglasses, and hearing aids. Over-the-counter items such as allergy medications, sunscreen, and first-aid supplies are also often eligible.
To maximize the benefits of an FSA, employees should review their expected healthcare needs during open enrollment. Consider these factors when calculating contributions:
- Major planned expenses, such as surgeries or orthodontics.
- Routine checkups or specialist visits not fully covered by insurance.
- Seasonal or recurring needs, like allergy treatments or prescription glasses.
- Updating first-aid kits or medicine cabinets with necessary supplies.
Important Considerations
FSAs are offered at the employer’s discretion, and plan terms may vary. Some employers may offer a grace period, allowing employees to spend unused funds until March 15 of the following year, but others may not, resulting in forfeited funds if they go unspent.
Eligible employees must enroll before their plan year begins to take advantage of these tax-saving benefits. However, self-employed individuals are not eligible to participate.
FSAs are an excellent way for employees to save on healthcare costs while lowering their taxable income. Be sure to check with your employer to understand the specifics of your plan, including contribution limits, eligible expenses, and any deadlines for spending funds. Planning ahead can ensure you make the most of this valuable benefit. Contact your Stephano Slack tax professional at 610-687-1600 or [email protected] to discuss your options.
Author Jessica Parson Gartensleben, Esq., LLM, specializes in helping high-net-worth individuals and families preserve their wealth by reducing their tax burdens. With her expertise in estate and trust planning, generational wealth transfers, and family business succession, she can guide you through every step of securing your financial legacy. Contact Jessica today at 610.235.4400 or [email protected] for personalized support tailored to your unique needs.
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