What Is the New Contribution Limit for Flexible Spending Accounts in 2023?
Key takeaways:
A flexible spending account (FSA) is an employer-sponsored health benefit that allows employees to pay for qualified out-of-pocket medical, vision, and dental expenses with tax-free dollars.
There’s a limit to how much money you can have withheld from your paycheck to fund your FSA every year. The annual contribution limit is adjusted every year for inflation.
The health FSA contribution limit is $3,050 for 2023, up from the previous year’s amount of $2,850.
A flexible spending account (FSA) is an employer-sponsored health benefit that allows employees to pay for qualified out-of-pocket expenses. Eligible expenses include certain medical, vision, and dental costs not covered by your health insurance plan. If you use your FSA dollars to cover eligible expenses for you, your spouse, or your dependents, you don’t have to pay taxes on the money.
There is a limit to how much you can contribute to an FSA every year. But, like in previous years, the IRS has increased the contribution limit on FSAs for 2023. The inflation-adjusted amount will allow you to put more tax-free dollars toward qualified healthcare items.
What is the FSA contribution limit for 2023?
In October 2022, the IRS announced the 2023 contribution limit for FSAs. The limit increased $200 from last year. This is a relatively large increase compared to previous years.
Prescription Savings Are Just the Beginning
See what other benefits you qualify for—from cashback cards to cheaper insurance.
In 2023, employees can contribute up to $3,050 to an FSA. If your spouse has a separate FSA under another employer plan, they can make a maximum contribution, too.
The annual contribution limit applies to health FSAs. This type of FSA allows you to pay for qualified out-of-pocket expenses, such as:
You generally can’t contribute to a health FSA and health savings account (HSA) at the same time.
If you have a limited-purpose FSA (LPFSA), you can also contribute up to $3,050 in 2023. With this type of FSA, you can still contribute to an HSA if your employer allows it. An LPFSA is primarily used to pay for dental and vision expenses. But your employer may give you the option to use it to pay for other qualified healthcare expenses after you reach your insurance deductible.
Contributing money to an FSA allows you to reduce your taxable income. Let’s say your annual salary is $50,000. If you contribute the maximum amount to an FSA in 2023, your taxable income would then be $46,950 for the year. Any federal, payroll, or state taxes (depending on your state) would be based on that amount.
How does the FSA limit for 2023 compare to the one from 2022?
The contribution limit for health FSAs is $3,050 for 2023, up from $2,850 in 2022. This $200 increase is higher than previous inflation-adjusted increases. From 2021 to 2022, for example, the contribution limit increased $100, from $2,750 to $2,850.
Why does the FSA contribution cap increase each year?
Every year, the FSA contribution limit is indexed to inflation. Surging prices have pushed inflation to record numbers in 2022. This led to a larger-than-usual increase in the FSA contribution limit from 2022 to 2023.
Here’s a table that shows maximum FSA contributions for 2016 through 2023. You’ll notice that the annual limit typically increasse by $50 or $100 every year, versus this year’s $200 increase.
| Year | Maximum FSA contribution limit per person |
|---|---|
| 2023 | $3,050 |
| 2022 | $2,850 |
| 2021 | $2,750 |
| 2020 | $2,750 |
| 2019 | $2,700 |
| 2018 | $2,650 |
| 2017 | $2,600 |
| 2016 | $2,550 |
Source: IRS
How much of my 2022 FSA can I roll over to 2023?
If you don’t use all the money in your 2022 FSA by the end of the year, you may be able to roll over a portion or all of your unused funds. Reach out to your employer to determine if you can take advantage of a carryover option or a grace period. But, keep in mind, your employer is not required to allow you to carry over funds at the end of the year.
For 2023, the carryover option allows you to roll over up to $610 of unspent FSA money at the end of the plan year. That’s up from $570 in 2022. The exact amount you can roll over depends on your employer.
If you’re able to rollover funds, it doesn’t affect the maximum amount you can contribute to an FSA in 2023. You’ll still be able to contribute up to $3,050, on top of any amount that you are allowed to roll over from 2022.
What is the process of rolling over funds from my 2022 FSA to 2023?
Typically, unused FSA funds automatically roll over into the new plan year if your employer allows it. Reach out to your FSA administrator and employer to confirm what happens to your unused FSA dollars.
Let’s say you elect to contribute $3,000 to an FSA in 2023. At the end of the plan year, you realize you only spent $1,500. You could carry over $610 if your employer gives you the option to roll over the maximum amount. However, you would lose the remaining $890.
It’s important to plan ahead to avoid forfeiting your FSA dollars at the end of the year. Here are some steps you can take to determine how much money you should put in your FSA:
Review your expenses from the current or previous year to determine how much you spent on healthcare.
Look at the IRS’ list of eligible healthcare expenses. You can also confirm eligible expenses with your FSA administrator. Some healthcare items may become FSA-eligible if you have a letter of medical necessity (LOMN) from your healthcare provider.
Consider any healthcare appointment or dental work that you may need to get taken care of in the near future.
Use this information to estimate how much you should set aside in your FSA. Remember, you may only be able to roll over a portion of your unused funds at the end of the year, even if your employer allows carryovers.
How long do I have to use my FSA funds?
A FSA is known for its “use it or lose it” feature. Meaning, unlike with an HSA, you have a deadline to use the funds in your FSA. Your money typically expires at the end of the plan year and needs to be rolled over for you to be able to access it.
Let’s say you’re getting close to the end of the year and you still have FSA funds available. You may not lose them immediately, since your employer may offer a grace period or carryover option. If your employer offers a grace period, you’ll typically have 2.5 months after the end of the plan year to spend any remaining money. With a carryover option, you will have more time to use the funds in your account. But there is a limit to how much you can carry over each year.
Your employer can offer either a carryover option or a grace period. They are not allowed to provide employees with both options.
What happens to unused FSA funds?
If you have money remaining in your FSA at the end of the plan year and you can’t roll it over, you won’t be able to withdraw it as cash. The unused funds will be returned to your employer, who can use them to:
Offset the costs of administering FSA benefits during the plan year
Divide the funds among employees who are enrolled in an FSA
Your employer can’t return those funds back to you directly. So it’s best to use as much of your FSA dollars as you can before the end of the plan year.
The bottom line
FSA contribution limits are adjusted annually for inflation. For 2023, you can contribute as much as $3,050 to your FSA, up from $2,850 in 2022. The extra $200 can help you set aside more tax-free money for healthcare expenses during the year. However, try not to set aside too much money. You may not be able to carry it over to the next year.
Why trust our experts?
References
Internal Revenue Service. (2022). 2021 Publication 969.
Internal Revenue Service. (2022). IRS provides tax inflation adjustments for tax year 2023.
This article is solely for informational purposes. This article is not professional advice concerning insurance, financial, accounting, tax, or legal matters. All content herein is provided “as is” without any representations or warranties, express or implied. Always consult an appropriate professional when you have specific questions about any insurance, financial, or legal matter.
