IRS to Increase Health FSA Contribution Cap to $3,050

On October 18th, in response to rising inflation, the IRS announced that the healthcare FSA annual contribution limit will increase to $3,050 from $2,850 in 2023– adding an extra $200 to health FSAs. The IRS also said that plans that allow carry-over of unused credits will see the carryover cap at $610, which is an additional $40.

The IRS’s Revenue Procedure 2022-38 also mentioned that the rise in cost-of-living adjustments (COLAs) will result in tax-exclusion cap increases for employer-sponsored commuting benefits and adoption assistance programs as well. These new caps will also apply to FSAs limited to services such as dental and vision care. However, these FSAs can also be used in combination with HSAs.

The IRS also stated that limit adjustments for benefit pension plans, 401(k)s, and other related contribution plans will be affected by COLAs in 2023.

Health FSA Contributions Provided by Employers

Employers can also contribute to employees’ FSAs. If they elect to do so, this contribution must be in addition to the amount added by the employee themselves. However, there are limits placed on the amount an employee contributes to their employees’ FSAs, which is directly correlated to the amount contributed by the employee.

These limits are:

• Up to $500 regardless if the employee makes a contribution or not
• For contributions at $501 and above, the employer can only match it per dollar contributed by the employee.

When you combine this with the new cap imposed by the IRS, the total contribution amount from both employer and employee in most cases will be $3,550– $3,050 max employee contribution + $500 max employer contribution.

Will Dependent Care FSAs Be Affected?

No, dependent care FSAs (DC-FSAs) will not be affected by these changes in 2023 and remain fixed at $5,000 for single taxpayers & married couples filing jointly or $2,500 for married couples who file separately. The DC-FSA (or dependent care assistance plans (DCAPs)/dependent care reimbursement accounts (DCRAs)) is aimed to help parents afford dependent care such as summer school, daycare, preschool, and other similar services and programs.

The DC-FSA can also be used for elder care under these specific requirements:

• The adult currently lives with the taxpayer at least 8 hours day
• The adult is claimed as a dependent on the taxpayer’s federal tax filing.

Legislation during COVID-19 expanded FSA carryovers to DC-FSAs. However, it only covered 2020 and 2021. For 2022 and beyond, FSA carryover will not apply to DC-FSAs.

Employers also have the option to contribute to DC-FSA for employees. However, the combined contribution from both parties must not exceed the limits placed by the IRS.

Will Commuting Benefits Be Affected?

The rising cost of fuel and general inflation also affects how we get to work. The IRS is addressing this by expanding the contribution limit for employer-funded pre-tax commuting benefits. The new limit is $300, up $280 in 2022, and applies to transit passes, van pools, and qualified parking areas.

Will Adoption Assistance Be Affected?

Employers can help subsidize some of the costs involved with adoption through adoption assistance. In 2023, the new limit for adoption assistance rises to $15,950 excluded from employee’s gross income– an additional $1,060. Expenses related to adoption must be considered “qualified” under IRS regulations, which they say must be “necessary and reasonable expenses.” It also includes court costs, legal fees, adoption agency fees, traveling costs, and other expenses directly related to adopting a child.

However, the amount excluded from gross income phases out depending upon the employee’s salary, which begins at the new limit of $239,230 in 2023. Although employers can reimburse funds beyond the limits posed by the IRS, the employee will have to pay taxes on any additional funds received.

Will Qualified Small Employer HRAs Be Affected?

Yes, the new changes will affect qualified small employer health reimbursement arrangements (QSEHRAs) in 2023. The new limit set by the IRS will be $5,850 for individual coverage and $11,800 for family coverage– up $400 and $750 respectively.

QSEHRA helps small employers (fewer than 50 employees) provide tax-free funds for their employees to pay for out-of-pocket medical-related expenses or premiums for ACA plans.

Nayya: Transforming the Employee Benefits Landscape

At Nayya, our goal is to help revolutionize the way that both employers and employees think about employee benefits.

With our Decision Support Tool, we make the entire process a breeze with personalized benefit recommendations that help employees choose the best benefits for their personal needs. When it comes to pre-tax programs like HSAs and FSA, Nayya can help employees understand just how much they can and should contribute to meet their health and financial goals throughout the year.

Interested in learning more? Read about Nayya, here.