HSA, FSA, and Dependent Care Account Updates: Navigating 2025 Regulatory Changes

Introduction

If you sponsor health savings accounts (HSAs), flexible spending accounts (FSAs), or dependent care FSAs for your employees, 2025 brings important regulatory changes you need to understand. These accounts have been fixtures of the employee benefits landscape for years, but rules evolve annually—and missing key updates can create compliance headaches and missed opportunities for your workforce.

As an independent benefits advisor working with small business owners and HR professionals across West Michigan, I’ve seen firsthand how these updates impact plan administration, employee satisfaction, and your bottom line. This guide translates the technical changes into practical guidance you can implement right away.

HSA Updates for 2025

New Contribution Limits and What They Mean

The IRS has increased HSA contribution limits for 2025, reflecting adjustments for inflation. Here’s what changed:

• Self-only coverage: $4,300 (up from $4,150 in 2024)
• Family coverage: $8,550 (up from $8,300 in 2024)
• Catch-up contributions (age 55+): $1,150 (unchanged)

What this means for your business: If you have employees contributing to HSAs, they now have additional room to save pre-tax dollars for qualified medical expenses. The increased limits provide better retirement planning opportunities for your workforce, which can be an attractive benefit recruitment tool.

Eligibility Clarifications

For 2025, the IRS has provided additional guidance on HSA eligibility that’s worth highlighting to employees:

• Employees remain ineligible if covered by any non-high-deductible health plan (HDHP), even if coverage is through a spouse or parent
• Medicare enrollment disqualifies participation (with limited exceptions for those who’ve elected HSA coverage before Medicare)
• Certain preventive services expanded under the Affordable Care Act remain covered under HDHPs without a deductible, even while maintaining HSA eligibility

Practical advice: Review your plan documents and employee communications to ensure clarity around these eligibility rules. Many employers benefit from annual reminders during open enrollment about who qualifies and why.

Qualified Medical Expense Updates

The definition of qualified medical expenses under HSAs rarely changes dramatically, but 2025 continues to clarify certain gray areas:

• Telehealth services are explicitly covered (this shouldn’t be news, but ensure your plan documents reflect it)
• Over-the-counter medications require a prescription or letter from a healthcare provider to be reimbursable
• Long-term care insurance premiums remain qualified, within limits based on age
• Menstrual products remain qualified medical expenses (confirmed under recent IRS guidance)

Pro tip: Provide your employees with a reference guide of qualified expenses. Many employees overpay out-of-pocket because they’re uncertain what their HSA can cover. This simple communication tool improves benefit utilization and employee satisfaction.

FSA Changes and Compliance Requirements

Updated Contribution Limits

FSA contribution limits have also increased for 2025:

• Healthcare FSAs: $3,300 (up from $3,200 in 2024)
• Dependent Care FSAs: $5,000 (unchanged for married couples filing jointly or single filers; $2,500 for married couples filing separately)

The Use-It-Or-Lose-It Rule Remains (With Limited Grace Periods)

One of the most confusing aspects of FSAs is the “use-it-or-lose-it” rule—employees must spend their elected FSA amounts within the plan year or lose forfeited funds. Here’s what employers need to know for 2025:

• No automatic carryover is permitted for healthcare FSAs (dependent care FSAs have different rules)
• Grace periods are optional but can extend the FSA run-out period by up to 2.5 months into the following year
• If you offer a grace period, it must be stated clearly in your plan documents and communicated to employees

Compliance alert: Ensure your plan documents explicitly state whether you’re offering a grace period. If they don’t mention it, you cannot implement one. This is a common compliance miss I see with smaller employers.

Substantiation and Documentation

The IRS has consistently emphasized that FSA claims require proper substantiation:

• Healthcare FSAs: Employees need documentation (EOB, receipt, prescription label) showing that services were medically necessary and expenses were incurred
• Dependent Care FSAs: Documentation must show the dependent’s name, SSN, date of care, and service provider information

Best practice: Implement a digital substantiation system if you haven’t already. Many third-party FSA administrators offer mobile app uploads, reducing administrative burden and improving compliance. This investment protects you from IRS audits.

Dependent Care FSA Specifics

Different Rules for Dependent Care

While healthcare FSAs operate under strict use-it-or-lose-it rules, dependent care FSAs have more flexibility:

• Carryover allowed: Up to $5,000 can carry over to the next plan year without forfeiture
• Run-out period: Claims must typically be submitted within 60-90 days after plan year-end (check your plan documents)
• Qualifying dependent definition: Generally children under age 13, but spouses or parents who are incapable of self-care may qualify

Tax Credit Coordination

Many employees don’t realize that dependent care FSA elections interact with the dependent care tax credit. Here’s what they need to know:

• You cannot claim both the dependent care FSA and the full dependent care tax credit for the same expenses
• Employees may benefit from using FSA funds (reducing taxable income by $5,000) rather than claiming the tax credit, depending on their tax bracket
• The opposite may be true for some employees—especially those with modest incomes who benefit more from the tax credit

Communication opportunity: During open enrollment, encourage employees to evaluate both options. Some may maximize their dependent care FSA while others might skip it entirely to capture the tax credit. This is a personalized decision that deserves attention.

Employer Obligations and Compliance Checklist

What You Must Do

As an employer sponsoring these accounts, you have specific legal obligations:

1. Update plan documents to reflect 2025 contribution limits and any changes to eligibility or qualified expense rules
2. Communicate changes to employees before open enrollment through summary plan descriptions or benefit guides
3. Maintain audit trails for FSA and HSA claims and substantiation
4. Ensure non-discrimination compliance for FSAs (they must not disproportionately benefit highly compensated employees)
5. Process claims promptly according to your plan timeline (usually 30-90 days)

Common Compliance Mistakes

In my work with small businesses, I’ve identified recurring compliance issues:

• Outdated plan documents: Many employers have documents that haven’t been updated in 3-5 years, missing cumulative regulatory changes
• Inadequate employee communications: Employees don’t understand their accounts, leading to underutilization and forfeiture
• Manual administration errors: Spreadsheet-based tracking increases mistakes and audit risk
• Unclear carryover/grace period policies: Employees receive conflicting information about what happens to unused funds

Action item: Schedule a 30-minute review of your current plan documents with your benefits advisor or attorney to ensure compliance.

Implementation Timeline for 2025

• Now (January-February): Update plan documents and communicate limits to employees
• Open enrollment period: Educate employees about new limits and changes
• Plan year start: Ensure payroll and benefits administrators have new limits in their systems
• Throughout the year: Monitor claims, maintain documentation, and watch for IRS guidance updates

Conclusion

The good news: 2025’s changes are primarily administrative (new limits) rather than structural overhauls. However, ensuring your business handles these updates properly requires attention to detail and clear communication. These accounts, when properly managed, provide significant value to your employees and tax advantages to your business.

If you’re uncertain whether your current plans are compliant or want to evaluate whether these account types make sense for your company, it’s worth having a conversation with a qualified benefits advisor. Every business is different, and what works for your competitor may not be ideal for you.

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Nexus Benefit Solutions is an independent employee benefits advisory firm based in West Michigan. Questions? Reach out at jason@nexusbenefitsolutions.com or call 616-425-9740.