IRS Releases 2025 Inflation-Adjusted Amounts for Healthcare FSAs, Commuter Benefits, and More.

Health FSAs

On October 22, 2024, the IRS announced in Rev. Proc. 2024-40 the annual inflation adjustments for the 2025 tax year.

Included in this announcement, and of consequence to the employee benefits world, the IRS noted that the dollar limit maximum for employee contributions made on a pre-tax basis via salary reductions to health flexible spending accounts (FSAs) under a cafeteria plan will be modified for 2025. For plans beginning on or after January 1, 2025, the dollar limit cap is permitted to increase (by $100) from $3,200 to $3,300. For cafeteria plans that allow for the carryover of unused amounts, the maximum carryover amount is now permitted to increase by $20, now capped at $660 (for 2025 rollovers into 2026 plans).

As a result of this news, employers should ensure that their health FSAs are administered in such a way as to prohibit employees from exceeding $3,300 in pre-tax contributions and, if applicable, no more than $660 in carryovers (from 2026 into 2026). Although, it should of course be noted that employers have the right to impose a maximum limit on employee contributions to health FSAs that is lower than what the ACA and these indexed limits permit. For example, an employer could opt to cap employee contributions for 2025 at $2,500 instead but cannot set the limit at $3,600 in defiance of the ACA’s provisions. Whatever amount the employer decides on should be communicated to employees during open enrollment and strictly adhered to. For employers that provide health FSA contributions, employees are permitted to elect up to the IRS limit and still receive the employer contribution in addition.

It should also be mentioned that the health FSA limit applies on an individual employee basis only. Therefore, even employees with spouses and dependents are still capped at $3,300 in maximum salary reductions for the year. Family members are eligible to enroll in their own separate health FSAs if they so choose, however.

Health Plan Limits			2023	2024	2025
Health FSA Contribution Limit			$3,050	$3,200	$3,300
Health FSA Carryover Limit			$610	$640	$660

 

Dependent Care Assistance Programs

Please be aware that while the American Rescue Plan Act of 2021 (ARPA) briefly increased the DCAP annual limits to $10,500 (up from what was previously $5,000) for single taxpayers and married couples filing jointly and to $5,250 (up from $2,500) for married individuals filing separately, these increased limits applied only to plan years beginning after Dec. 31, 2020 and prior to Jan. 1, 2022. We communicated this “sunset” in 2022 and again in 2023.

After returning to its pre-pandemic limit of $5000 per year in 2022, the DCAP maximum contribution amount will remain at that same amount for 2025 as well. As the DCAP maximum is not adjusted for annual inflation, the limit will continue to be $5000 per year if single or $2,500 for married people filing separately. As it was prior to ARPA, married couples will continue to have a combined $5,000 limit in total, regardless of whether both parties have access to separate DCAPs through their own employer.

DCAP Limits		2023	2024	2025
		$5,000	$5,000	$5,000

 

Commuter Benefits

Further noted in Rev. Proc. 2024-40, for taxable plan years beginning in 2025, the monthly limitation for commuter benefits will increase by $10 from $315 to $325. This applies to qualified parking and transit benefits alike.

Parking and Transit Limits (Per Month)		2023	2024	2025
Parking		$300	$315	$325
Transit		$300	$315	$325

 

Health Savings Accounts and High Deductible Health Plans

Please see our previous guidance on the 2025 adjusted limits for HSAs and HDHPs, as addressed in Rev. Proc. 2024-25.

Highly Compensated Employees

On November 8, 2023 (almost a year ago), the IRS increased the threshold amount for determining who is considered a highly compensated employee (HCE) to $155,000. This is up from the previous thresholds (2023’s was $150,000, and 2022’s was $135,000). This amount fluctuates annually due to cost-of-living adjustments. Under the ownership test, an employee would also be considered an HCE if they were at least a 5% owner at any time during the current or preceding plan year. Sometime this November we might expect to see that HCE level increased again, and will update this post when the IRS releases that number (which will apply to 2026 plan years as they look back to see who was an HCE in 2025).

It should be noted that for non-discrimination testing (NDT) purposes, plans utilize the prior year’s wages and rules in making determinations, so this shift in the threshold amount will not come into play there until a 2026 NDT analysis is completed.