IRS Releases 2025 Inflation Adjustments for Employee Benefit Plan Limits

The IRS has announced its annual inflation adjustments for various employee benefit plan limits, effective for taxable years beginning in 2025. HR professionals should be aware of these updates to ensure compliance and help employees maximize their benefits. Below is a summary of the key changes:

Cafeteria Plans

For 2025, the dollar limit on voluntary employee salary reductions for contributions to health flexible spending arrangements (FSAs) has increased to $3,300, up from $3,200 in 2024. If the cafeteria plan allows for the carryover of unused amounts, the maximum carryover amount for 2025 is $660, an increase from $640 in 2024. The dependent day care FSA limits remain unchanged at $5,000 ($2,500 for married individuals filing separately).

Qualified Transportation Fringe Benefit

For taxable years starting in 2025, the monthly limit on the exclusion for qualified transportation benefits has been adjusted:

1. The limit for transportation in a commuter highway vehicle and any transit pass is $325 (up from $315 in 2024).
2. The limit for qualified parking is also $325 (up from $315 in 2024).

Adoption Assistance Programs

For 2025 the amount an employee can exclude from gross income for the adoption of a child with special needs is $17,280 (up from $16,810 in 2024). The maximum exclusion for expenses incurred by an employer for qualified adoption expenses under an adoption assistance program is also $17,280.

Additionally, the exclusion begins to phase out for taxpayers with a modified adjusted gross income exceeding $259,190, with the exclusion completely phasing out at $299,190 or more.

Medical Savings Accounts (MSAs)

For 2025, the IRS has updated the definitions for high-deductible health plans (HDHPs) under

Medical Savings Accounts:

1. Self-only coverage: The annual deductible must be between $2,850 and $4,300, with out-of-pocket expenses not exceeding $5,700.
2. Family coverage: The deductible must be between $5,700 and $8,550, with out-of-pocket expenses capped at $10,500.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

For 2025, to qualify as a QSEHRA, the annual limit on payments and reimbursements is $6,350 for self-only coverage and $12,800 for family coverage. These limits represent a slight decrease from the 2024 limits of $6,150 and $12,450, respectively.

These updates reflect the annual inflation adjustments and should be reviewed by HR professionals to ensure that benefit plan offerings comply with IRS regulations and that employees are informed of the updated limits for 2025.