Contributing to a medical savings account, such as an FSA (flexible spending account) can lower your taxable income. Your contributions to FSAs and health savings accounts (HSAs) accounts are tax-free.
However, there are limits to how much you can contribute each year. And if you exceed those contribution limits, you could face financial penalties.
Here's some good news: FSA contribution limits are higher for 2024 than last year. Here's what you need to know.
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FSA limit for 2024
If you don’t have a high-deductible health plan with an HSA, opening an FSA may be an option. However, unlike health savings accounts, you can only open an FSA if your employer offers one. That means self-employed taxpayers aren’t eligible for FSAs.
But if you have an FSA in 2024, here are the maximum amounts you can contribute for 2024 (tax returns normally filed in 2025).
- The 2024 maximum FSA contribution limit is $3,200.
- For cafeteria plans that allow the carryover of unused amounts, the maximum carryover amount for 2024 is $640.
Penalty for making excess contributions
If you exceed contribution limits for your FSA, the excess amount will be subject to regular income tax. But that’s not all. An excise tax of 6% will also apply to any amount over the contribution limit.
If you’ve exceeded your medical savings plan contribution limit, you can correct the mistake, if you withdraw the excess funds before the federal tax filing deadline. Don’t forget to withdraw any interest earned on the excess funds to avoid additional taxes.
HSA vs. FSA: Which is better?
HSAs and FSAs each come with advantages and disadvantages. Which type of medical savings account is best for you depends on your circumstances.
For example, a low deductible health plan (which disqualifies you for an HSA) makes more sense for people with significant medical expenses. However, an HSA might be a good option for taxpayers with lower out-of-pocket medical expenses or if their employer doesn’t offer any medical savings account.
What are qualified medical expenses? Typically, funds in an FSA or HSA can be used to pay for the same qualifying medical expenses. Here are a few examples of expenses that qualify:
- Copays
- Prescription and non-prescription drugs
- Prescription eyeglasses
- Dental procedures
For a full list of qualifying medical expenses, you can check with your medical savings account provider.
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