Flexible Spending Account Contribution Limits

A flexible spending account (FSA) allows workers to put aside money on a pretax basis and use it to pay for covered medical and healthcare expenses. Workers can use payroll deductions to fund their accounts, making it that much easier to save. But important changes are coming to FSA plans, and workers need to be prepared.

Current Limits

• Currently, the IRS does not impose a cap on how much pretax income workers can contribute to their flexible spending accounts. As a result, the cap is generally set by each employer, with most firms capping the contributions at less than $5,000. If you have a high level of healthcare expenses, contributing the maximum amount to your employer's FSA can save you a great deal of money.

Future Limits

• The healthcare reform law passed in 2010 places new limits on the amount employees can put aside in a flexible spending account. Beginning in 2013, workers will be able to put aside only $2,500 in their flexible spending accounts. After 2013, that $2,500 FSA limit will be adjusted each year for inflation, but it is still a significant drop from the maximum many employers now allow.

OTC Medications

• In the past, owners of flexible spending accounts could use their pretax money to purchase over-the-counter (OTC) medications, including cough and cold remedies, allergy medication and more. But as of Jan. 1, 2011, flexible spending account participants no longer have that option. This change is also part of the healthcare reform legislation.

HSA Option

• The changes to flexible spending accounts starting in 2013 apply whether you use the plan to cover just you or you and your whole family. Since the combined out-of-pocket healthcare costs for a family could exceed the $2,500 limit, employees who need to save might want to look at opening a health savings account (HSA), as well as a flexible spending account. With an HSA, you can put aside money and and get a deduction when you do your taxes.