The Pros and Cons of FSAs in 2025 Explained

We live in a world where health costs don’t just affect your body; they touch every corner of your financial life. So when you hear about a tool that helps you save on medical expenses tax-free, your ears perk up.

Enter the FSA, Flexible Spending Account. It’s one of the most misunderstood yet powerful tools in the employee benefits space.

And in 2025, it’s time to finally clear the fog.

At Section125Group, we work with companies and individuals across the country to help them understand, design, and optimize FSA plans. So this guide isn’t just about numbers, it’s about real-world clarity. The kind that saves people money, not just gives them more paperwork.

So let’s break down the pros and cons of FSAs in 2025. We’ll walk through how they work, who they’re right for, what’s changed, and how you can use them to your advantage, not regret.

What Is an FSA and Why Does It Matter in 2025?

An FSA, or Flexible Spending Account, lets you set aside pre-tax dollars from your paycheck to pay for qualified medical expenses.

That means you pay less in taxes and more of your money goes toward your health, not to Uncle Sam.

In 2025, FSAs will still play a meaningful role in employee benefits, especially as healthcare premiums and out-of-pocket costs continue to rise. But as with any financial tool, you need to know both sides of the coin.

Let’s start with the upside.

The Advantages of FSAs (The Pros)

FSA Tax Benefits That Make a Real Difference

Tax savings aren’t just theoretical, they’re powerful.

When you contribute to an FSA, that money is pulled before taxes. This lowers your gross taxable income, which means:

• You pay less in federal income taxes
  
• You pay less in Social Security and Medicare (FICA) taxes
  
• Your take-home pay increases without increasing your salary
  
  

That’s a triple-win in the world of payroll strategy. And from the employer’s side? Companies also save on FICA taxes when employees participate, an often-overlooked benefit that Section125Group helps employers optimize.

Immediate Access to Funds

Here’s something unique: FSAs give you access to your full annual election amount on January 1st, even though you haven’t fully contributed that money yet.

That means if you sign up for $2,000 in FSA contributions for the year, you can use all $2,000 in January, even if you’ve only paid in $100.

It’s like an interest-free, tax-free healthcare loan that pays you first.

Use It for Everyday Needs

You don’t have to be dealing with chronic illness or major surgery to use your FSA. In 2025, qualified FSA expenses still include:

• Copays and deductibles
  
• Prescription medications
  
• Over-the-counter items (yes, Tylenol counts!)
  
• Vision and dental expenses
  
• Medical devices like crutches, blood pressure monitors, and more
  
  

The list is longer than most people realize, and tools like FSA store cards make spending your funds convenient and transparent.

Helps With Budgeting

Think of an FSA as a dedicated budget for your health. Instead of guessing at your expenses, you create a plan. You decide what you’ll set aside. You track how you use it.

This creates financial mindfulness and predictability, a rarity in healthcare planning.

Employer Contributions

Not all FSAs come with employer contributions, but some do—and when they do, it’s like getting free healthcare money. These contributions do not count toward your personal annual limit and can boost your healthcare purchasing power instantly.

Employers that work with Section125Group often implement partial FSA matches or fixed contributions to improve recruitment and retention, without adding the complexity of traditional raises.

The Drawbacks of FSAs (The Cons)

Of course, no financial tool is perfect. And FSAs have a few limitations that deserve attention, especially if you want to avoid unexpected losses.

The “Use It or Lose It” Rule

This is the big one and often the reason people avoid FSAs altogether.

Traditionally, FSAs follow a use-it-or-lose-it model. That means if you don’t spend the funds by the end of the plan year (or grace period), you forfeit the leftover money.

However, there’s a silver lining in 2025:

• Employers can allow a rollover of up to $640 (an increase from previous years)
  
• Alternatively, they can offer a grace period of up to 2.5 months into the next year
  
• But they can’t do both, it’s one or the other
  
  

This is where working with a knowledgeable administrator like Section125Group becomes crucial. We help employers select the option that fits their workforce best—whether it’s rollover flexibility or extended spending time.

You Can’t Adjust Contributions Easily

Once you choose your FSA election amount during open enrollment, you can’t change it unless you experience a qualifying life event (like marriage, childbirth, or job change).

This makes forecasting your medical expenses important. Guess too low, and you miss out on savings. Guess too high, and you could lose unused funds.

Tip: Use your prior year’s spending and a realistic health outlook to guide your decision.

No Portability

FSAs are tied to your employer. If you leave your job mid-year, any unspent FSA funds usually stay with the employer.

This lack of portability is a sharp contrast to Health Savings Accounts (HSAs), which follow you wherever you go. It’s why FSAs work better for people with stable employment or those with predictable health expenses during the year.

Limited to Employers Who Offer Them

Not every employer provides FSAs, and you can’t set one up yourself as an individual or freelancer. FSAs are offered through Section 125 Cafeteria Plans, which only employers can sponsor.

This is a key area where Section125Group supports businesses. We help design and administer compliant cafeteria plans that unlock tax savings for employers and employees alike, ensuring all documentation, IRS compliance, and plan details are handled correctly.