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October 20, 2022
In Revenue Procedure 2022-38, the IRS sets forth a variety of 2023 adjusted tax limits. Among other things, the notice indicates that employee contribution limits toward health flexible spending arrangements (FSAs) and qualified transportation fringe benefits will increase for 2023. The limit on annual employee contributions toward health FSAs for 2023 is $3,050, with the ability to carryover up to $610. The limit on monthly contributions toward qualified transportation and parking benefits for 2023 is $300.
The full text of Rev. Proc. 2022-38, including 2023 amounts and limitations for other taxes, may be found at: opens in a new windowhttps://www.irs.gov/pub/irs-drop/rp-22-38.pdf.
The 2023 annual contribution limit of $3,050 for health FSAs applies to employee contributions. The same limit applies for general-purpose and limited-purpose health FSAs. Employer contributions are not subject to the limit, but are subject to different restrictions under healthcare reform rules.
NOTE: Annual dependent care assistance program (DCAP) reimbursement limits are set by statute and not subject to inflationary adjustments, and therefore remain at $5,000 for single taxpayers and married couples filing jointly, or $2,500 for married people filing separately.
Employee contributions subject to the $3,050 annual limit include:
Employees may elect up to $3,050 in 2023 even if they’ve carried over up to $570 from the 2022 plan year. In addition, employees who join mid-plan year may still elect up to $3,050 for the remainder of the plan year. The limit applies per employee, rather than on a household basis, so if both spouses are employed and eligible for health FSA coverage, each spouse could contribute up to $3,050 for 2023. Finally, the limit applies on a per employer basis, so an employee who works for two separate employers that are unrelated (i.e., not part of a controlled group or affiliated service group due to common ownership or shared services), whether simultaneously or at different times during the same plan year, may elect up to $3,050 under each employer’s health FSA.
Employer contributions may be made in addition to the $3,050 allowed for employee contributions. However, a health FSA must meet “excepted benefit” status to avoid violating health care reform requirements. To meet excepted benefit status, the health FSA must satisfy the following two conditions:
The combination of employee and employer contributions elected for the plan year must be made available throughout the plan year to reimburse qualifying medical expenses, even if the amounts have not yet been contributed (the “uniform coverage” rule). If an employee exhausts the funds and then terminates participation mid-plan year, the employer cannot request repayment. However, if the employee does not incur enough expenses during the plan year to exhaust the amounts contributed, the employee will forfeit the remaining balance (the “use-or-lose” rule) subject to any grace period or carryover provision in place for the plan. Plans can have up to a 2 1/2-month grace period, or a carryover of up to $610 (for 2023), but never both. NOTE: The extended grace period (up to 12 months) and expanded carryover (uncapped) were available only for plan years ending in 2020 and 2021 and were no longer available beginning with the 2022 plan year.
Instead of annual contribution limits, qualified transportation fringe benefits are subject to monthly limits. The 2023 monthly limit of $300 applies separately to:
An employee could elect up to $300/month for each (up to $600/month to use toward a combination of transportation and parking benefits, but no more than $300 for each benefit). For qualified transportation fringe benefits, both employee and employer contributions count toward the monthly limit.
Just like contribution limits apply monthly, employees generally have an opportunity to change elections monthly (or even more frequently). Unused contributions cannot be cashed out, but they can be used in subsequent months. So, if an employee fails to use all amounts contributed for qualified transportation or parking benefits and then terminates coverage, the leftover amounts would be forfeited. But if the employee continues participation in the plan, and perhaps reduces contributions for future months, unused amounts from one month may be used for coverage in later months (up to $300 in any given month).
The views and opinions expressed within are those of the author(s) and do not necessarily reflect the official policy or position of Parker, Smith & Feek. While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it.