On Oct. 18, 2022, the IRS released Revenue Procedure 2022-38 (Rev. Proc. 22-38), which includes the inflation-adjusted limit for 2023 on employee salary reduction contributions to health flexible spending accounts (FSAs). The release also includes cost-of-living adjustments for employee-qualified transportation fringe benefits for the 2023 taxable year, along with annually adjusted numbers for 2023 for other tax provisions.
Health Care Flexible Spending Accounts
For plan years beginning in 2023, the Affordable Care Act (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. In addition, the maximum carryover limit for a health FSA increases to $610 for 2023 (from $570 for 2022). The carryover limit applies to funds remaining in an FSA at the end of the plan year (i.e., $570 remaining at the end of 2022 can be applied to a 2023 health FSA, in addition to the annual contribution limit. Employers should ensure that their health FSAs will not allow employees to make pre-tax contributions in excess of $3,050 for the 2023 plan year and communicate the 2023 limit to their employees as part of the open enrollment process.
Employer Health FSA Limit
An employer may continue to impose its own dollar limit on employees’ salary 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 decide to limit employee health FSA contributions for the 2023 plan year to $2,500.
Per Employee Health FSA Limit
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 he or she has family members who benefit from the funds in that FSA. However, each family member who is eligible to participate in his or her 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.
Qualified Transportation Fringe Benefits
Internal Revenue Code Section 132(f) allows employers to offer qualified transportation benefit programs to their employees on a tax-free basis. Under these programs, employees may have money withheld from their taxable compensation to pay or reimburse work-related expenses for qualified parking, transit passes, and transportation in certain commuter highway vehicles. The combined monthly limit for transportation in a commuter highway vehicle and a transit pass will increase to $300 in 2023, up from the 2022 limit of $280. The monthly limit in 2023 for qualified parking will also increase to $300 from $280. Employers may also provide these benefits tax-free to employees.
Employer Action
The 2023 Health FSA and Qualified Transportation Benefit Limits should be communicated as part of open enrollment so employees can make informed adjustments to their salary reduction contributions.
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Please Note: The information contained in this letter is not legal advice and should not be relied upon or construed as legal advice. This letter is for general informational purposes only and does not purport to be complete or cover every situation. Please consult your own legal advisors to determine how these laws affect you.
