An FSA is an employer-owned spending account into which employers and employees can deposit pre-tax money up to the IRS annual limit. Employees can use these contributions to pay for qualified medical, dental, vision, and dependent care expenses but must use their entire balance prior to the end of the plan year otherwise any remaining money will be forfeited to the employer.
Employers can choose to allow employees to either rollover up to $660 in unused funds in 2025 to the following year or they can give employees a 2 ½ month grace period after the end of the plan year in which to use their remaining money. Employers can only offer one option but don’t have to offer either.
There are three types of FSAs
FSA employee eligibility requirements
FSAs work with any type of health insurance, the only requirement is that employees must access a General Purpose or Limited Purpose FSA through an employer.
If both spouses in a married couple are offered FSAs through their employers, both may contribute to separate FSAs up to the annual limit.
In order to offer an FSA on a pre-tax basis, employers must have an active Section 125 Cafeteria Plan.
To be eligible for a DCFSA employees must:
- Access the benefit through their employer.
- Have at least one of the following living with them full time: a child who is under the age of 13 or a spouse or relative who is physically or mentally incapable of taking care of themselves.
- If the employee and their spouse are divorced, only the spouse with primary custody may contribute to this type of FSA.
- If the employee is married, both spouses must work and earn income unless one spouse is disabled and unable to work.
If employees don't follow these rules, the money they and the company contribute to their FSA will be forfeited and they will have to pay income taxes on the forfeited amount.
Why offer it?
- Gives employees a tax-free way to pay for qualified medical expenses. Employees' contributions are tax-free so they can save up to 37% on their medical expenses (depending on their tax bracket).
- Helps lower employer FICA taxes. Since employee FSA contributions are made pre tax, they lower employers’ payroll tax obligation.
- Helps lower employer business taxes. FSA elections and employer contributions can be considered non-taxable income.
- It’s a flexible supplemental benefit. Since FSAs can be paired with any kind of health insurance, these accounts give employees the flexibility to build the benefits package that works best for them and their families.
- Unused funds are forfeited to the employer at the end of the plan year or if the employee leaves the company.
2025 FSA contribution limits
The IRS annual limit for 2025 employee contributions to a General Purpose or Limited Purpose FSA is $3,300 regardless of whether they’re enrolled in an individual health insurance plan or a family plan.
Rollover limits are $660 in 2025.
If both spouses have access to an FSA through their employers, both can contribute up to the annual max.
Employers can contribute up to $500 to employee Healthcare FSAs regardless of whether or not the employee contributes any money.
Starting at $501, employers can only match up to dollar-for-dollar of employee contributions. Employer contributions to Healthcare FSAs are not counted towards employee annual contribution limits.
The IRS annual limit for 2025 employee contributions to a dependent care is $5,000 for single people or married couples filing jointly.
They may contribute up to $2,500 if they're married but file taxes separately (each spouse can contribute $2,500 to separate FSAs).
Employers may contribute to a DCFSA, but those contributions count towards the contribution limit.
Lively's FSA Guide
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