FSA Limit Rises to $3,500: How Much to Set Aside

Your benefits portal is open, the enrollment deadline is a week away, and one box is still blank: how much to put in your flexible spending account. Type too little and you pay tax on money you were always going to spend at the pharmacy. Type too much and the leftover goes back to your employer in the spring.

That box just got bigger. The FSA limit rises to $3,500 for plan years starting next year, up $100, under inflation figures the IRS published on November 5. A higher ceiling sounds like good news, and it can be. It also gives you more room to overshoot.

This guide shows you how the new FSA limit works, what you actually save per dollar, and a simple test for picking an election you will use in full.

What Changed: The New FSA Limit and Carryover

The IRS adjusts dozens of figures for inflation each fall. In its November 5 release from the IRS, the agency set the health FSA cap at $3,500, up from $3,400. For plans that allow unused money to roll forward, the maximum carryover climbs to $700, up $20.

The same release lifts the monthly limit for transit and parking benefits to $350, up $10. If your employer offers a commuter account, that election usually sits on the same enrollment screen.

Two details trip people up every year:

• The limit is a ceiling, not a default. If you put in $2,000 this year, you will put in $2,000 next year (or nothing at all) unless you change it. Many employers require a fresh FSA election every year rather than rolling the old one forward.
• The limit is per employee. If you and your spouse both have access to an FSA through your own jobs, each of you can elect up to $3,500.

So the new number matters only if you act on it. Here is what acting on it is actually worth.

How Much an FSA Really Saves You

An FSA works through payroll. Your employer takes your election out of each paycheck before taxes and holds it in an account you draw on for medical costs. According to IRS Publication 969, you don't pay federal income tax or employment taxes on the salary you contribute. Employment taxes means Social Security and Medicare, which together take 7.65% of most paychecks.

That stacking is what makes the account powerful. Add up your rates:

• Federal income tax: 22% for a typical middle-income single filer
• Social Security and Medicare: 7.65%
• State income tax: say 5%, though it varies and a few states have none

Together that is 34.65 cents saved on every dollar you run through the account and spend. Put another way, a $100 pair of glasses bought with FSA money costs you about $65 of take-home pay.

The account also front-loads your money. Publication 969 says you must be able to receive the maximum reimbursement at any time during the coverage period, regardless of how much you have actually contributed so far. Elect $3,500, and the full amount is available in January even though only one paycheck has funded it. That helps if you have surgery or a big dental bill scheduled early in the year.

The Forfeit Problem: Why 4 in 10 People Lose Money

The tax break comes with a hard rule. IRS Publication 969 calls FSAs "use-it-or-lose-it" plans: money you don't spend by the deadline goes back to the employer. Your employer can soften that in one of two ways, but not both:

• A carryover: up to $700 of unused money rolls into the next plan year. Your plan can set a lower cap.
• A grace period: up to two and a half months after the plan year ends to spend the old balance. For a calendar-year plan, that runs to mid-March.

Some plans offer neither. Check your plan summary before you pick a number, because it changes the math below.

Forfeiting is common. The Employee Benefit Research Institute studied more than 3.3 million accounts, and as InsuranceNewsNet reported in October, about 40% of holders forfeited money in the latest year of data. Those who lost money lost $404 on average. Younger workers fared worst: two-thirds of account holders under 25 forfeited something.

The same data shows the average contribution was $1,431, far below the old $3,400 cap. Most people are not maxing out. They are guessing, and a good share of them guess high.

Worked Example: Choosing an FSA Election With Real Numbers

Meet Dana. She earns $70,000, pays the combined 34.65% marginal rate from above, and looks back at her last twelve months of medical spending:

• Copays for 10 doctor visits at $40: $400
• Monthly prescription at $35: $420
• Two dental cleanings and a filling, after insurance: $480
• New glasses: $300
• Over-the-counter medicine and first-aid supplies: $150

That totals $1,750 of predictable spending. She also has a crown her dentist recommended, quoted at $650 out of pocket. Call that likely but not certain. Her solid number is $2,400.

Option one: elect $2,400

Spread over 26 paychecks, $2,400 is about $92 per check. If she spends it all, she saves $2,400 times 34.65%, or about $832 in tax. Her forfeit risk is close to zero.

Option two: elect the full $3,500

That is about $135 per check. Suppose she only spends the same $2,400, leaving $1,100 unused. The extra $1,100 cost her $1,100 minus 34.65%, or about $719 of take-home pay. What happens next depends on her plan:

• Plan with a $700 carryover: $700 rolls forward and $400 is forfeited. Her real loss is about $19, because the tax she saved on the extra money nearly covers the forfeit.
• Plan with no carryover or grace period: the whole $1,100 is gone. She lost about $719 of take-home pay chasing tax savings she never got.

Same election, same spending, and a $700 swing in the result based on one line in a plan document.

The 65% Rule for Your Open Enrollment Decision

Dana's example points to a simple test you can use on any expense you are unsure about.

When you spend an FSA dollar, you gain about 35 cents in tax savings. When you forfeit one, you lose about 65 cents of take-home pay. Those two numbers set the bar. Only add an uncertain expense to your FSA if you are more than about 65% sure you will have it, in a plan without a carryover. With a lower tax rate, the bar is higher; at a 12% federal rate plus payroll tax and state tax, it moves closer to 75%.

A practical way to apply it:

1. Start with what repeats. Prescriptions, routine dental, contacts or glasses on a set schedule. These go in at 100%.
2. Add what is booked. A procedure your doctor has scheduled, braces with a signed treatment plan, a known deductible you hit every year.
3. Weigh what is likely. Use the 65% test on each item. A crown your dentist flagged clears the bar. "Maybe I'll get LASIK" probably doesn't.
4. Use the carryover as a cushion. If your plan rolls over up to $700, you can safely round your estimate up by a few hundred dollars.

If your health premiums also climbed this year, our guide to paying less after a health insurance premium jump walks through plan choices that pair well with an FSA.

Mistakes That Cost FSA Holders Money

A few traps catch people who otherwise pick a sensible number.

Blocking your HSA. If you are on a high-deductible health plan, a general-purpose FSA, including one through your spouse, generally makes you ineligible to contribute to a health savings account. Publication 969 covers the exceptions, such as limited-purpose FSAs that pay only dental and vision costs. An HSA has no forfeit rule at all, so check this before you enroll.

Forgetting what counts. Under Publication 969, over-the-counter medicine counts as a qualified expense whether or not it is prescribed, and so do menstrual care products. Insurance premiums do not. Neither does anything another plan already paid for.

Losing receipts. Most FSA debit cards approve purchases instantly, but the plan can still ask for proof later. Keep receipts in one folder or photo album until the claim is closed.

Treating the FSA as savings. It is a spending account with a clock on it. Money you want to keep belongs in a regular account; our look at where to put your cash as savings rates fall covers those options.

Frequently Asked Questions

What is the FSA limit for next year?

The health FSA contribution limit is $3,500 for plan years beginning next year, up $100 from the current $3,400. The IRS announced it on November 5. Your employer can set a lower cap, so check your enrollment materials.

What happens to unused FSA money?

It goes back to your employer unless your plan offers a carryover or a grace period. A carryover lets up to $700 roll into the next year. A grace period gives you up to two and a half extra months to spend it. A plan can offer one or the other, not both.

Can I change my FSA contribution in the middle of the year?

Usually not. Your election is locked for the plan year unless you have a qualifying life event, such as marriage, divorce, a new child, or a change in employment. That is why the number you pick during open enrollment matters so much.

Can I have an FSA and an HSA at the same time?

Not a general-purpose health FSA. It makes you ineligible to contribute to an HSA. A limited-purpose FSA that covers only dental and vision costs can sit alongside an HSA.

Is it smart to max out my FSA?

Only if you are confident you will spend the full amount. Maxing out saves the most tax when you use every dollar, but each forfeited dollar costs you more than a used dollar saves. Base your election on last year's actual spending plus any expenses already scheduled.

Set Your Number Before the Deadline

The new $3,500 FSA limit gives you more room to shelter medical spending from tax, and at a 34.65% combined rate that shelter is real money. The win comes from accuracy, not size. Pull last year's receipts, add what is already booked, run the uncertain items through the 65% test, and check whether your plan has a carryover or grace period.

Then log in and change the number yourself. The higher limit does nothing for you if last year's election quietly rolls forward.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always consult with a qualified financial advisor before making investment decisions. Past performance is not indicative of future results.