Health FSA Contribution Limit Will Increase for 2023

Oct 26, 2022 | Employee Health Benefits, Hiring an Employee, Newsworthy

For plan years beginning in 2023, the limit on an employee’s salary reduction contributions to a health FSA increases to $3,050.

The IRS released the inflation-adjusted limit for 2023 on employee salary reduction contributions to health flexible spending accounts (FSAs).

The Affordable Care Act (ACA) imposes a dollar limit on employees’ salary reduction contributions to health FSAs. This dollar limit is indexed for cost-of-living adjustments and often increases from year to year.

For plan years beginning in 2023, the ACA’s adjusted dollar limit on employees’ salary reduction contributions to health FSAs increases to $3,050.

This is a $200 increase from the 2022 health FSA limit of $2,850. The maximum carryover limit for a health FSA also went up to $610 for 2023 (from $570 for 2022).

Household employers who offer their workers health FSAs should ensure that their plans will not allow employees to make pre-tax contributions in excess of $3,050 for the 2023 plan year and communicate the new limit to their employees.

Employer limits on a Health FSA

An employer may continue to impose its own dollar limit on employees’ pay reduction contributions to health FSAs as long as the employer’s limit does not exceed the ACA’s maximum limit in effect for the plan year. For example, an employer may limit employee health FSA contributions for the 2023 plan year to $2,500.

Per employee limit for Health FSAs

The health FSA limit applies on an employee-by-employee basis. Each employee may only elect up to $3,050 in salary reductions in 2023, regardless of whether they have family members who benefit from the funds in that FSA. However, each family member who is eligible to participate in their own health FSA will have a separate limit. For example, a husband and wife who have their own health FSAs can both make salary reductions of up to $3,050 per year, subject to any lower employer limits.

About Health FSAs

An FSA is funded by your employee with pre-tax dollars up to the annual limit. Funds are used to pay for certain medical and dental expenses for your employee, their spouse, and their dependents. Some qualified expenses include:

Health insurance deductibles and co-payments (but not premiums)
Prescription medications
Over-the-counter medicines with a doctor’s prescription (reimbursements for insulin are allowed without a prescription)
Medical equipment and supplies like crutches, bandages, and diagnostic devices like blood sugar test kits

Employees generally must use FSA funds within the plan year. However, employers can provide a grace period of up to 2 1/2 months to use money in an FSA or allow a carryover of some funds (based on the carryover limit) into the following plan year.

Employers can – but aren’t required to – make contributions to their employee’s FSA.

How a Health FSA saves you money

Since money is taken out on a pre-tax basis, your employee’s taxable income is reduced meaning both you (as the employer) and your employee may be able to lower your tax responsibility. An FSA can help your worker save anywhere from 30 to 40 percent on their out-of-pocket expenses.

Using a Health FSA as a retention/attraction tool

Offering an FSA can help you retain your best employees and attract top talent to your positions. An FSA is an easy and affordable way to offer health benefits and stand out among other families seeking household workers In fact, according to our 2022 survey of household employers, only one in four families with household help offer some form of health benefits to their employees.

GTM can help

With licensed insurance brokers on staff, GTM Payroll can help set up an FSA for your employee so they can start to reap the benefits of pre-tax savings. For questions or to get started, give us a call at (800) 929-9213 ext. 7214.