Health FSA and Qualified Transportation Fringe Benefits for 2023

Annual FSA Contributions for 2023

With Revenue Procedure 2022-38, employees can put an extra $200 annually into their health FSA in 2023, as the maximum annual contribution allowed increases to $3,050, up from the 2022 maximum of $2,850. Reflective of recent inflation rates, that increase amount between 2022 and 2023 is twice as much as it was between 2021 and 2022. In 2022, the increase was only $100 annually compared to the contribution limit set for 2021, which was $2,750.

Additionally, if the benefit plan design allows employers to permit the carryover of unused FSA amounts, the maximum carryover for 2023 to 2024 increased to $610 from the $570 amount for carryover allowed from 2022 to 2023.

The maximum contribution limit per year for health care FSAs of $3,050 for 2023 applies to employee contributions only. The limit also applies to limited-purpose and general-purpose healthcare FSAs.

Contributions by employers aren’t required to adhere to the contribution limit, though they are required to adhere to other restrictions related to healthcare reform guidelines.

Annual Employer FSA Contributions

If an employer’s Health FSA meets the “excepted benefit” status, the employer can also make contributions in addition to the maximum annual contribution limit allowed for employees. To adhere to the status of excepted benefit, the employer’s FSA needs to meet the following requirements:

•            Availability Condition. Individuals must have access and be eligible for both a non-excepted group health plan or major medical coverage for the plan year and the FSA. However, individuals do not need to be enrolled in both plans.

•            Maximum Benefit Condition. Maximum FSA benefits payable to plan participants can’t exceed the higher of:
 

–           $500 plus the amount of the employee’s elected salary reduction

–           Two times the employee’s elected salary reduction

If a health care FSA doesn’t meet “excepted benefit” status, the company is subject to fines for violating health care reform requirements.

Annual Employee FSA Contributions

The two types of employee contributions that are required to adhere to the 2023 annual contribution limit of $3,050 include:

•            Flex credits offered by the employer that employees can apply toward cash and additional taxable benefits

•            Pre-tax contribution amounts deducted from employees’ pay through an FSA cafeteria plan

Employees can elect to contribute up to the maximum limit, even if they chose to carry over the maximum allowed from the prior plan year. For example, an employee can still contribute $3,050 to their health care FSA, even if they carried over the allowed $570 from 2022 to 2023. Additionally, an employee who joins later in the plan year can also opt to elect up to the full contribution amount for the plan year.

In other words, if an employee joins the FSA health care plan in June of the current plan year, they can contribute up to the maximum amount allowed for that plan year, which would be $2,850 for 2022 and $3,050 for 2023.

The FSA health care plan contribution limit is applied on a per-employee basis instead of a per-household basis. That means that if each spouse is employed and meets the eligibility requirements to participate in FSA health care plans, they can each choose to contribute up to the maximum amount of $2,850 for 2022 and $3,050 for 2023.

The contribution limit also adheres to a per-employer basis, assuming that the employers aren’t related by being a part of an affiliated service group or a controlled group because of shared services or common ownership. Thus, if an individual is eligible for an FSA under more than one employer, regardless of if it is at different periods of the plan year or simultaneously, they can choose to contribute up to the maximum of $2,850 in 2022 or $3,050 in 2023 under each employer’s health care FSA if the employers aren’t related by being a part of an affiliated service group or a controlled group because of shared services or common ownership.

Health FSA Uniform Coverage Rule

Under the Uniform Coverage Rule, the full amount of both the employer and employer contributions must be made accessible at the beginning of the plan year to reimburse the employee for qualified healthcare expenses. This applies in cases where the contribution amount has not yet been contributed, as well. Also, if an employee terminates employment before the end of the plan year and their contributions have not yet equaled what they’ve used so far from their FSA, the employer can’t deduct additional funds from the employee’s final paychecks or request repayment to make up the difference.

On the flip side, FSAs apply a “use it or lose it” rule, which means that if an employee doesn’t use the contributed money in their FSA account before the end of the plan year, they lose it. Because it’s not uncommon for FSA funds to go unused, it’s helpful for employers to provide employees with a reminder notification to get the proper documentation submitted to the plan administrator by the final due date.

In addition to the optional carryover amount previously discussed for FSAs ($610 for 2023 and $570 for 2022), employers have the option to offer a grace period of up to 2.5 months after the plan year-end date for employees to use their remaining FSA funds. Claims can be submitted for both the grace period and the plan year. Employers can either offer a carryover or grace period option, but never both.

NOTE: An extended grace period of up to 12 months and an expanded uncapped carryover was issued under the Consolidated Appropriations Act of 2020 (CAA) due to COVID for plan years ending in 2020 and 2021. The extension and expansion have expired as of the beginning of the 2022 plan year and as such, are no longer an option.

Additional 2023 IRS Tax Adjustments

The following adjustments were also made to employer-offered benefits for the 2023 plan year:

•            Adoption Assistance Exclusion and Adoption Credit: The maximum amount that can be excluded from an employee’s gross income under an employer-provided adoption assistance program in 2022 is $14,890. Additionally, the maximum adoption credit allowed to an individual for the adoption of a child is $14,890. These amounts are increasing to $15,950 and $15,950 each for 2023. Also, both the credit and exclusion will begin to be phased out for those with modified adjusted gross incomes (AGIs) of $239,230 or more. For those with modified AGIs of $279,230 or more, they will be phased out completely.

•            Qualified Small Employer HRS (QSEHRA): In 2022, QSEHRA’s maximum payment and reimbursement amounts are $5,450 for self-only coverage and $11,050 for family coverage. These amounts are increasing to $5,850 and $11,800, respectively, for 2023.

Contact KBI with Questions

If you have questions about these changes or additional IRS Tax Adjustments for 2023, give KBI a call. We’re here to help.