Despite thousands still dying each week from COVID-19 in the U.S., certain pandemic relief provisions have come to an end in the last year. And it looks like employers may need to prepare themselves for more changes ahead.
The Internal Revenue Service has upped the contribution limit on flexible spending accounts to $3,050, allowing 20% of that amount, or $610, to carry over from 2023 into 2024. As tax-advantaged financial accounts, healthcare FSAs are typically used to pay for medical and dental expenses not covered by insurance with money an employee contributes from their paychecks throughout the year. Employers can choose to contribute as well.
The new changes for 2023 seem to be in response to inflation, as the contribution limit did increase by $200 rather than the average annual increase of $100. But it's important to note that FSA users will only be allowed to carry $570 into 2023, per the IRS's announcement at the end of 2021. Compared to the pandemic relief provided in 2020 and 2021, when employees could carry over their entire remaining balance, this extension can still seem limiting.
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"The most important thing to remember is the relief provisions that allowed employers to offer full carryover of unused health independent care balances into the next year has expired," says Lisa Myers, director of client services for benefit accounts at Willis Towers Watson, a multinational insurance advisory. "This means employees may have an extra large unused balances at the end of 2022 that they are in danger of forfeiting."
Myers notes that since the pandemic may have prevented workers from seeking care or delaying non-emergency appointments, it may be harder to spend their FSAs — hence the unlimited carryover rule. A study from Harvard T. H. Chan School of Public Health found that 20% of adults reported themselves or a household member delaying care because of the pandemic in 2021. But as we head into the new year, many within the
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While many FSA users may find the limit frustrating, Myers points out that the notion of carryover is fairly new. FSAs originally fell under a "use it or lose it" rule until 2014 when a carryover limit was introduced at $500. But as many Americans struggle to face an inflated cost of living, these carryover limits may still be challenging.
Notably, employers are not required to update their plans to the new limit (or even offer a carryover allowance), and employees will need to check with their employer to see if they are taking advantage of the increase, explains Myers. Some employers may provide a two-and-a-half-month grace period instead, in which employees can use their remaining funds. But regardless of what employers decide, Myers advises companies to clearly inform their workforce of their current carryover limit and any changes in 2023. Employees should have the chance to forfeit as little money as possible.
"Clearly communicate deadlines and carryover provisions if you have any," says Myers. "Encourage employees to check their balances and provide information about the many expenses that can be paid for with FSA."
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In fact, the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, has permanently expanded what Americans can buy using their FSA. Eligible expenses now include over-the-counter medications like Tylenol or Motrin as well as menstrual hygiene products. If an individual has bought any over-the-counter medications or menstrual products since Jan. 1, 2020, they can be reimbursed through their FSA.
Myers also encourages FSA users to look at online marketplaces that only sell FSA-eligible products — Amazon even has an FSA store.
With these changes in mind, Myers hopes employers take the time to inform their employees of how they can get the most use of their FSAs before the new year.
"The IRS has reverted back to the pre-pandemic rules," says Myers. "Help employees by preventing them from forfeiting funds."
