What are the contribution limits for HSAs and FSAs?

Understanding the Contribution Limits for HSAs and FSAs

Navigating the world of health savings💡 Definition:Frugality is the practice of mindful spending to save money and achieve financial goals. accounts (HSAs) and flexible spending accounts (FSAs) can be tricky, especially when it comes to understanding contribution limits. These accounts offer valuable tax advantages but come with rules that are crucial to follow. In this article, we’ll break down the contribution limits for both HSAs and FSAs, provide practical examples, and address common pitfalls to help you make informed decisions.

HSA Contribution Limits

What is an HSA?

A Health Savings Account💡 Definition:A tax-advantaged savings account for medical expenses, available only with high-deductible health plans. (HSA) is a tax-advantaged savings account designed to help individuals with High Deductible Health Plans (HDHPs) pay💡 Definition:Income is the money you earn, essential for budgeting and financial planning. for qualified medical expenses. The key benefits include tax-deductible contributions, tax-free growth, and tax-free withdrawals for eligible expenses.

Contribution Limits for 2025

For 2025, the contribution limits for HSAs are as follows:

• Self-only coverage: $4,300
• Family coverage: $8,550
• Catch-up contribution💡 Definition:Extra retirement contributions allowed at age 50+. 401k: additional $7,500/year. IRA: additional $1,000/year. Helps late savers close gap. (age 55+): Additional $1,000

These limits include both employee and employer contributions. For example, if your employer contributes $1,500 to your HSA and you have self-only coverage, you can contribute up to $2,800 to reach the total limit of $4,300.

FSA Contribution Limits

What is an FSA?

A Flexible Spending Account💡 Definition:A pre-tax account for medical expenses that must be used within the plan year or you lose the money (use-it-or-lose-it rule). (FSA) is a workplace benefit that lets employees set aside pre-tax dollars for healthcare and dependent care expenses. Unlike HSAs, FSAs are not tied to HDHPs and typically have a "use-it-or-lose-it" policy, though some plans allow limited carryover.

Contribution Limits for 2025

For 2025, the contribution limits for FSAs are:

• Health Care FSA (HC-FSA): $3,300 with a maximum carryover of $660
• Dependent Care FSA💡 Definition:Pre-tax savings account for childcare expenses, allowing you to set aside up to $5,000/year tax-free to pay for daycare and after-school care. (DC-FSA): $5,000 per household or $2,500 per spouse if married filing separately

For instance, if an employee contributes the full $3,300 to their HC-FSA but uses only $2,800 during the year, they can carry over $660 to the following year, depending on their employer’s plan rules.

Real-World Examples

HSA Example

Consider a 50-year-old employee with family coverage under an HDHP in 2025. With the contribution limit💡 Definition:A contribution limit is the maximum amount you can legally invest in a financial account, helping you save effectively. set at $8,550, they decide to maximize their contributions. If their employer contributes $2,000, the employee can contribute up to $6,550 to reach the full limit. They can also contribute an additional $1,000 as a catch-up contribution since they are over 55.

FSA Example

An employee participating in an HC-FSA elects to contribute $3,300 in 2025. Throughout the year, they incur $2,800 in eligible medical expenses. Depending on the carryover policy, they can roll over up to $660 of unused funds into 2026.

Common Mistakes and Considerations

• Overcontribution Penalties: Exceeding the contribution limits for either HSAs or FSAs can result in tax penalties, making it crucial to track contributions carefully.

• Eligibility for HSAs: To open and contribute to an HSA, you must be enrolled in an HDHP and not be covered by other non-HDHP insurance or Medicare💡 Definition:Medicare is a federal health insurance program for those 65+ and certain younger people, crucial for managing healthcare costs..

• Portability and Rollover: HSA funds roll over indefinitely and are portable if you change jobs. In contrast, FSA funds usually must be used by the end of the plan year, except for any carryover allowed by your employer.

• Use-It-or-Lose-It Policy: For FSAs, it’s essential to plan your contributions wisely to avoid losing unused funds at year-end.

Bottom Line

Understanding the contribution limits and rules for HSAs and FSAs is essential for maximizing their tax benefits and avoiding penalties. With HSAs offering a higher limit and indefinite rollover potential, they are ideal for long-term savings. FSAs, while more restrictive, provide immediate tax savings for anticipated healthcare and dependent care expenses. Always review your options💡 Definition:Options are contracts that grant the right to buy or sell an asset at a set price, offering potential profit with limited risk. during open enrollment💡 Definition:Open Enrollment is a designated period to enroll in health coverage, vital for ensuring access to medical services. and consult with your employer or a 💡 Definition:A fiduciary is a trusted advisor required to act in your best financial interest.financial advisor💡 Definition:A financial advisor helps you manage investments and plan for financial goals, enhancing your financial well-being. to make the most of these valuable tools.