How to Calculate Your FSA Contribution Amount

A Flexible Spending Account, or FSA, is an employer-sponsored benefit that allows you to set aside money for certain expenses before taxes are calculated on your income. This process reduces your overall taxable income, which means you pay less in federal, Social Security, and Medicare taxes. The funds are deducted directly from your paycheck throughout the year in equal installments.

Deciding on the right amount to contribute requires careful planning. Over-contributing can lead to forfeiting your money, while under-contributing means you miss out on tax savings for expenses you will pay for anyway. This guide explains how to analyze your expected costs and understand the rules to arrive at a beneficial contribution amount.

Gathering Your Expense Information

The first step in determining your FSA contribution is to create a comprehensive estimate of your qualifying expenses for the upcoming plan year. This involves a detailed review of past spending and a forward-looking assessment of anticipated needs. It is helpful to separate these estimates based on the type of FSA, as Health FSAs and Dependent Care FSAs cover different costs and have separate contribution rules.

Health FSA Expenses

A Health FSA is designed to cover a wide array of medical, dental, and vision costs that are not paid for by your insurance plans. To build your estimate, begin by reviewing the previous year’s explanation of benefits (EOB) statements from your insurer, which detail your out-of-pocket responsibilities like deductibles, copayments, and coinsurance. You should also gather receipts from pharmacies for prescriptions.

Project future needs by factoring in planned procedures, prescription changes, or new corrective lenses for your family. Remember to include costs for dental work, vision care like glasses and contacts, and eligible over-the-counter items. Common examples include pain relievers, cold medicines, and first-aid supplies.

Dependent Care FSA Expenses

A Dependent Care FSA is used to pay for the care of qualifying individuals, which enables you and your spouse to work or look for work. Eligible dependents typically include children under the age of 13 or a spouse or other relative who is physically or mentally incapable of self-care. Common expenses include payments to daycare centers, preschools, or in-home providers.

To estimate these costs, review your current payment agreements with care providers and include variable fees like those for summer day camp. Expenses for overnight camps are not eligible. While schooling costs for children in kindergarten or higher grades are generally not reimbursable, expenses for before- or after-school care programs may qualify.

Understanding Key FSA Rules and Limits

You must consider the regulations that govern FSA contributions. The Internal Revenue Service (IRS) sets annual limits; for 2025, the maximum employee contribution to a Health FSA is $3,300. For a Dependent Care FSA, the 2025 limit is $5,000 per household, or $2,500 if you are married and filing separately. Your employer may set a lower limit, so confirm the maximum allowed under your plan.

A primary regulation for FSAs is the “use-it-or-lose-it” rule. This provision states that any funds left in your account at the end of the plan year are forfeited to your employer. To mitigate the risk of forfeiture, employers can offer one of two exceptions, but not both. You must check your plan documents to see which option, if any, your employer has chosen.

One exception is the carryover provision, which allows you to move a certain amount of unused funds to the next plan year. For the 2025 plan year, the maximum carryover amount is $660. This carried-over money does not count against the new year’s contribution limit.

The other exception is a grace period, which gives you an extended window, typically up to two and a half months after the plan year ends, to incur new expenses and use your remaining balance. For example, a calendar-year plan ending December 31 would provide until March 15 of the next year to spend the funds. Any money unspent after the grace period is forfeited.

The Calculation and Final Decision

With your expense estimates and an understanding of the rules, you can determine your final contribution amount. This involves comparing your projected costs to the established limits and making an adjustment based on your employer’s specific plan features. The goal is to contribute enough to maximize your tax savings without putting a significant amount of money at risk of forfeiture.

Start with your total estimated expenses for either your Health or Dependent Care FSA. Your contribution cannot exceed the limit set by the IRS or your employer, whichever is lower. For example, if you estimate $4,000 in medical expenses but the IRS limit is $3,300, your maximum contribution is $3,300.

Next, adjust your contribution based on your plan’s rules. A carryover provision of up to $660 allows you to contribute closer to your full estimate, as a small overage can move to the next year. A grace period also lowers the forfeiture risk by giving you more time to incur expenses, while a plan with neither option may warrant a more conservative contribution.

Finally, check if your employer contributes to your FSA. If so, you must subtract the employer’s contribution from your total estimated expenses before determining your own payroll deduction amount. This prevents you from overfunding the account.