As health insurance and treatment costs rise and recognizing the potential for tax savings and other benefits, more employers have started offering flexible savings accounts to their employees.
FSAs are also an important way to enable employees who are not enrolled in high-deductible health plans with attached health savings accounts to save money over the year for medical and related expenses.
A study by the National Business Group on Health predicts that 66% of employers will be offering FSAs to their employees in 2023, up from about 60% in 2018 and 52% in 2015 and making for an increase of 27% in less than a decade.
The study predicts that uptake will continue growing as employers look for ways to help their employees put aside funds for medical services, pharmaceuticals, copays, coinsurance and other medical items.
Also, the total amount saved in these vehicles was $30.7 billion in 2020, up 8.7% from the year prior, according to medical equipment supplier AvaCare Medical. The average amount of money placed into FSAs has increased every year since 2015, reaching an average of $2,400 in 2022, according to the IRS and the Bureau of Labor Statistics.
While they have always offered tax savings and other benefits for individuals and businesses, the increasing popularity of FSAs is likely due to the rising cost of health care.
Participating employees can contribute up to $3,050 in 2023, up $200 from 2022. Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. The limit only applies to how much an employee can contribute to their account.
If the plan allows, the employer may also contribute to an employee’s FSA.
Employer contributions (including non-cashable flex credits) generally cannot exceed $500 per plan year for the health FSA to maintain excepted benefit status. That means that the maximum health FSA available in 2023 will be limited to $3,550 ($3,050 maximum employee contribution + $500 maximum employer contribution).
Another important note: Health FSA eligibility cannot be broader than the major medical plan eligibility to maintain excepted benefit status, under the Affordable Care Act. That means that a health FSA should never be available to an employee who is not also eligible for a major medical plan.
Under the law, enrollees must use up the funds they set aside during the year or forfeit the remainder, unless their employer allows part of the funds to be carried over.
Also, if a cafeteria plan permits health FSA carryovers, the maximum amount that a participant can carry over from the 2023 to the 2024 plan year is $610, up $40 from the maximum carryover amount from 2022 to 2023.
Some employers may provide a two-and-a-half-month grace period during which employees can use their remaining funds.
Regardless of what you decide in terms of allowing carryovers, you should clearly inform your workforce of your current carryover limit and any changes in 2023. That way, you give your staff the ability to avoid forfeiting as much as possible at the end of the year.
What FSA funds can be spent on
Some of the qualified medical expenses that are not covered by health insurance, and for which employees can pay using FSA funds, are:
- Dental and vision care services
- Eyeglasses and hearing aids
- Chiropractic and acupuncture
- Physical therapy
- Other medical devices
- Prescription drugs
- Over-the-counter medications.