The IRS has announced the 2025 cost-of-living adjustments (COLA) for various tax-advantaged accounts, including Flexible Spending Accounts (FSAs). This blog post will walk you through the key changes and their implications.
Here’s a quick summary of the 2025 limits for Health & Welfare Benefit Plans that have been impacted with this release:
- Health Care FSA maximum contribution limit $3,300
- Transportation Plans: transit and parking allowances $325
- Adoption Assistance program maximum excludable amount $17,280
- Adoption tax credit is $17,280
Check out our full list of the latest benefit contribution limits now.
What are Cost-of-Living Adjustments?
Cost-of-living adjustments are essential in maintaining the purchasing power of money in the face of inflation. Every year, the IRS reviews and revises these limits to reflect economic changes. For HR professionals, understanding these adjustments is crucial for effectively managing employee benefit programs. On October 22, 2025, several significant updates were made to FSAs and other tax-advantaged accounts, which we detail below.
New FSA Contribution Limits for 2025
One of the most anticipated updates each year is the change in the maximum contribution limit for Health Care FSAs. In 2025, the IRS has increased this limit to $3,300. This adjustment allows employees to set aside more pre-tax dollars for medical expenses, providing greater financial flexibility and potentially reducing taxable income.
For HR professionals, this change means updating employee communications and payroll systems to accommodate the new limits. It’s also an opportunity to educate employees on the benefits of maximizing their FSA contributions, as doing so can lead to significant tax savings.
FSA Medical Carryover Limit Increase
In addition to the maximum contribution limit, the IRS has also adjusted the FSA medical carryover limit. For 2025, employees can carry over up to $660 of unused FSA funds to the following year. This increase provides more flexibility for employees who may not fully utilize their FSA funds within a single year.
Transportation Plans Adjustments
Transportation and parking allowances are another area where the IRS has made adjustments for 2025. The new limit for these plans is $325. This change affects employees who take advantage of pre-tax commuting and parking benefits, offering them the opportunity to save more on transportation costs.
For HR departments, it’s important to update payroll systems and employee communication materials to reflect these changes. Providing clear information on how employees can benefit from these allowances is crucial for encouraging participation and maximizing savings.
Adoption Assistance Program Changes
The IRS has also revised the maximum excludable amount for adoption assistance programs, setting it at $17,280 for 2025. This adjustment reflects the increasing costs associated with adoption and aims to provide greater financial support to employees expanding their families through adoption.
Adoption Tax Credit Update
Alongside the adoption assistance program changes, the IRS has also adjusted the adoption tax credit for 2025, setting it at $17,280. This credit helps offset the costs associated with adoption, making it more accessible and affordable for families.
HR professionals should ensure that employees are aware of this valuable credit, as it can significantly reduce the financial burden of adoption. Providing resources and guidance on how to claim the credit can help employees fully benefit from this adjustment.
Health Savings Account (HSA) Contribution Limits
Earlier this year, the IRS announced the 2025 contribution limits for Health Savings Accounts (HSAs). For individuals, the limit is $4,300, while families can contribute up to $8,550. These increases provide employees with more opportunities to save for healthcare expenses on a tax-advantaged basis.
IRS Announcement of Health & Welfare Limits
The IRS’s release of the 2025 health and welfare limits is a critical update for HR professionals managing employee benefits. Understanding these limits ensures compliance with federal regulations and helps optimize benefit offerings.
HR departments should review the announcement in detail, making necessary adjustments to benefits plans and systems. Staying informed about these changes positions HR professionals to provide the best possible support and guidance to their employees.
Retirement Plan Contribution Limits
On November 1, 2024, the IRS announced the retirement plan cost-of-living adjustments. The most notable retirement and pension plan contribution limit changes are that 401(k) / 403(b) / 457 plan contribution limits increased by $500, for a total of $23,500. Catch-up contributions for those plans remain the same as 2024, $7,500. Maximum plan compensation for retirement plan purposes increased to $350,000.
Other important retirement and pension plan increases include:
- Defined Contribution Maximum Annual Contribution Limit – increased to $70,000.
- Defined Benefit Maximum Annual Benefit Limit – increased to $280,000.
- Highly Compensated Employees’ Compensation Limit – increased to $160,000.
- Key Employee Officer Compensation Limit – increased to $230,000.
Beginning in 2025 under SECURE 2.0, individuals ages 60 to 63 will be eligible for increased catch-up contributions in their retirement plans. This enhanced catch-up contribution limit is $10,000 or 150% of the standard age 50+ catch-up contribution limit, whichever is greater. For example, in 2024 the catch-up limit for those age 50+ is $7,500. With the 2025 enhanced catch-up contribution limit for those age 60-63 will be $11,250. This applies to 401(k), 403(b), and governmental 457(b) plans that currently offer catch-up contributions. It’s also important to note that this change is optional for employers, so each plan sponsor will decide whether to implement this feature in their retirement plans.
For a complete list of retirement and pension plan cost-of-living adjustments, visit the IRS notice.
Engaging Your Workforce with Updated Benefits
Beyond compliance, these adjustments present an opportunity for HR professionals to engage employees with their benefits. Highlighting the advantages of maximizing contributions and utilizing available credits can encourage employees to actively participate in their benefits programs.
By fostering a culture of informed benefits utilization, HR teams can enhance employee satisfaction and retention. Engaged employees are more likely to appreciate the value of their benefits, leading to a more motivated and committed workforce.
