- New FSA contribution limit. The IRS increased the employee contribution limit in flexible spending accounts by $200 to $3,050 in 2023.
- Changes up to the employer. The IRS’ announcement comes after the open enrollment period for some organizations; thus, employers are not required to update their plans for the new 2023 limit.
- Inflation concerns. Critics of the IRS’ contribution limit for 2023 say it doesn’t go far enough in addressing inflation concerns and will hurt retirement savings for employees.
The Internal Revenue Service (IRS) announced on Oct. 18 that employees may contribute up to $3,050 to flexible spending accounts in 2023.
The new contribution level is a $200 jump up from the $2,850 limit in 2022 and driven by inflation, said Lisa Myers, director of client services, benefits accounts at WTW.
The new limit applies to plan years beginning in 2023. And for cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610 — an increase of $40, the IRS said.
Myers noted that this announcement could be too late for some employers that have already closed open enrollment, meaning an adjustment might not be possible to 2023 plans.
“Employers may, but are not required to, update their plans for this new limit,” Myers said. “Employees should check with their employers to find out whether they will be able to take advantage of the increase and how since employers may not have time to update their enrollment systems for the new limit.”
The limit also applies to limited-purpose FSAs that are restricted to dental and vision care services, which can be used in tandem with health savings accounts (HSA).
The IRS released 2023 HSA contribution limits in April, which are set at $3,850 (up from $3,650) and the family contribution limit will be $7,750 (up from $7,300).
Shobin Uralil, co-founder and chief operating officer at Lively, a health savings account provider, said the IRS’ FSA limit increase doesn’t go nearly far enough to keep up with inflation.
“The recent increase in FSA contribution limits is a step in the right direction, but it isn’t nearly enough to address the problem we’re facing,” he said. “Americans are seriously struggling due to high inflation rates, and the reality is that they will need more ways to save and invest their dollars to protect their retirement.
“We'd like to see Washington adopt many common sense measures that open up the power of long-term healthcare savings to all Americans.”
Employers’ health FSA plans have two options — a carryover or grace period — to choose from that should be communicated clearly to employees during and after open enrollment.
The grace period option can include a two-and-a-half-month window for employees to spend the remaining FSA funds that are not spent by the employee within the plan year. The second option employers can provide is allowing participants to carry over unused funds at the end of the plan year, up to an inflation-adjusted limit set by the IRS ($610 in 2023) and still contribute up to the maximum in the next plan year.
Myers noted that the commuter benefit limit on pre-tax contributions also increased from $280 to $300 in 2023, and the maximum exclusion for employer-provided adoption assistance has increased from $14,890 to $15,950 in 2023.
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