In the US, an employer-sponsored benefit called a Flexible Spending Account (FSA) enables employees to set aside a percentage of their pre-tax income for qualifying expenses.
It comes in two primary categories: medical and dependent care. For eligible medical costs that are not covered by insurance coverage, a Medical FSA is used.
FSA Medical and Dependent Care Categories
These costs may include co-pays, deductibles, prescription costs, and some supplies for medical care.
Doctor visits, dental work, vision treatment, prescription eyeglasses, and hearing aids are a few examples of medical expenses that can be paid for with a Medical FSA.
Employees will be able to make an additional $200 contribution to their health care FSAs this fiscal year, the IRS stated on October 18.
Health FSAs now have a $3,050 annual contribution cap, up from $2,850 in 2022. This $200 increase, which doubles the $100 increase from 2021 to 2022, is meant to reflect the most current inflation.
The maximum carryover amount will increase if an employer’s plan supports the carryover of unused health FSA funds. The carryover amount cap increased from $570 to $610.
The IRS also disclosed that the tax-exclusion levels for adoption assistance programs and employer-sponsored transportation benefits have been increased to reflect the cost of living in 2023.
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Updating Payroll and Plan Administration
These changes were described in depth in Revenue Procedure 2022-38 and were also briefly discussed in a news release.
This year, the FSA restrictions were announced sooner than in years past, which saw the introduction of the limitations in November.
Due to the schedule, companies have more time to update their open enrollment platforms and materials.
Given that many businesses are currently in the middle of open enrollment for 2023, these disclosures are at least timely, according to lawyers at the international law firm McDermott Will & Emory.
Plan sponsors should take immediate action to account for the changes by updating payroll and plan administration as well as open enrollment communications.
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