How Much Should I Contribute to My FSA?

A Flexible Spending Account (FSA) offers a tax-advantaged way for individuals to save for certain healthcare or dependent care expenses. This employer-sponsored benefit allows you to contribute a portion of your income on a pre-tax basis, reducing your taxable income. Funds withdrawn for qualified expenses are also tax-free, leading to significant savings on federal income tax, Social Security tax, and Medicare tax. FSAs help manage anticipated out-of-pocket costs, making them a valuable benefit.

Understanding FSA Contribution Limits

The Internal Revenue Service (IRS) sets annual limits on how much an individual can contribute to an FSA, with separate limits for Health Care FSAs and Dependent Care FSAs. For the 2025 plan year, the maximum amount an employee can contribute to a Health Care FSA through payroll deductions is $3,300. If your spouse also has a Health Care FSA through their employer, they can contribute up to $3,300 to their plan, allowing a household to contribute up to $6,600.

Dependent Care FSAs have a different set of limits. For 2025, the annual maximum contribution for a Dependent Care FSA is $5,000 for individuals or married couples filing jointly. If you are married but filing separately, the limit is $2,500 per person. While these limits are established by the IRS, employers can set lower maximum contribution amounts for their specific plans.

Identifying Eligible Expenses

Understanding eligible expenses is key to maximizing your FSA benefits. Funds from a Health Care FSA can be used for a broad range of medical, dental, and vision expenses for diagnosis, treatment, or prevention of disease. Common eligible expenses include doctor visits, prescription medications, eyeglasses, contact lenses, and dental work. Over-the-counter medications and menstrual care products became eligible without a doctor’s prescription. Costs for medical equipment like crutches, supplies such as bandages, and diagnostic devices like blood sugar test kits are covered.

Dependent Care FSAs cover expenses related to the care of a qualifying individual, allowing you (and your spouse, if filing jointly) to work or look for work. Eligible individuals include a child under the age of 13, or a spouse or other dependent of any age who is physically or mentally incapable of self-care and lives in your home. Qualified expenses include daycare, preschool, before- and after-school care, and summer day camps. Payments for a nanny or in-home care for qualified individuals can also be reimbursed.

Estimating Your Needs

Accurately estimating your future eligible expenses is important for determining an appropriate FSA contribution. Start by reviewing your past spending on healthcare and dependent care. Gather records from the previous year, including receipts for medical bills, prescription costs, dental expenses, vision care, and any out-of-pocket dependent care payments. This historical data provides a realistic baseline for your anticipated costs.

Consider any known upcoming expenses that might impact your needs in the next plan year. This could involve planned surgeries, orthodontic treatment, new prescriptions, or changes in your family’s health status. If you are expecting a child, factor in increased medical costs for prenatal care and delivery, as well as potential future childcare expenses. Similarly, evaluate any changes in your childcare arrangements, such as transitioning from part-time to full-time care or enrolling a child in a new program.

Be cautious when estimating your contributions due to the “use-it-or-lose-it” rule. While using pre-tax funds for eligible expenses is beneficial, overestimating can result in the forfeiture of unused money. Some employers and FSA administrators offer online tools or calculators that can assist in this estimation process.

Navigating the Use-It-Or-Lose-It Rule

A key aspect of FSAs is the “use-it-or-lose-it” rule, meaning funds not used by the end of the plan year are forfeited. This rule highlights the importance of careful planning to avoid losing pre-tax contributions. Most FSA plans operate on a calendar year, meaning funds must be spent by December 31st, though the plan year can vary by employer.

Employers, however, may offer one of two exceptions to this rule to provide participants with more flexibility. One option is a carryover, which allows a limited amount of unused Health Care FSA funds to be rolled over into the following plan year. For 2025, the maximum carryover amount is $660. This means you would not lose the entire unused balance if it falls within this limit.

Alternatively, an employer might offer a grace period, which provides an extension of up to two and a half months after the plan year ends to incur and use remaining FSA funds. For instance, for a calendar year plan, a grace period would extend the spending deadline to March 15th of the following year. Employers can choose to offer either a carryover or a grace period, but not both, or they may choose to offer neither. Reviewing your specific plan details during open enrollment is crucial to understand how these exceptions apply.