We know keeping up with all of the healthcare regulations and updates can be a challenge. This is why we've compiled the latest information regarding Health Savings and Flexible Spending Accounts for 2023.
Keep reading to learn more.
HSAs: Health Savings Accounts
Health savings accounts (HSAs) are a growing trend in health care. An HSA is a tax-exempt savings account established for the purpose of paying for the qualified medical expenses of an individual and/or his or her spouse and tax dependents. HSAs are designed to provide eligible individuals with the following federal tax benefits:
- HSA contributions are tax-free.
- Interest and other earnings on HSA contributions accumulate tax-free.
- Amounts distributed from an HSA for qualified medical expenses are tax-free as well.
In addition to tax benefits, HSA plans have grown in popularity because they offer potential health care cost savings to both employers and employees. For example, individuals covered under an HSA are more likely to seek preventive care, choose generic drugs, not misuse the emergency room, and use online tools to research health care providers.
HSA Eligibility
HSAs are offered in combination with high deductible health plans (HDHPs). To be HSA-eligible, an individual must be covered under a qualified HDHP and not also covered by another health plan that is not an HDHP (with a few exceptions, including disability, dental care, vision care and long-term care insurance). HDHPs generally have lower monthly premiums and higher deductibles than traditional health plans.
HSAs can cover medical expenses until the HDHP deductible is reached. The idea of this design is that the HSA pays for routine, smaller health expenses, while the HDHP offers protection in the event of a catastrophic medical expense, such as an unexpected illness, injury or hospitalization.
Because HSA amounts are non-forfeitable, amounts contributed to an HSA can increase savings for future health care needs, even into retirement.
In general, money placed into an HSA can be withdrawn at any time. Any HSA withdrawal used for a purpose other than to pay for qualified medical expenses is taxable as income and subject to an additional 20% penalty. After an individual reaches age 65, the additional penalty tax does not apply to HSA withdrawals.
Additional HSA Basics
- HSAs are controlled and owned by the individual or employee. HSA owners are responsible for annually reporting HSA contributions and distributions to the Internal Revenue Service (IRS) as an attachment to their IRS Form 1040 (U.S. Individual Income Tax Return).
- HSA contributions are non-taxable, and can be made by the HSA owner, an employer, a family member or any other person for months during which the owner is HSA-eligible.
- Annual limits apply to HSA contributions. The amount of the annual limit is federally mandated, and depends on whether the HSA owner has individual or family HDHP coverage.
- HSA funds, including interest and earnings, accumulate tax-free from year to year. HSAs are not subject to the “use it or lose it” rule applicable to health flexible spending accounts (FSAs).
- HSAs are portable, meaning individuals keep their HSAs even if they change jobs, change medical coverage or make other life changes.
- Even if an HSA owner is no longer HSA-eligible (for example, because the owner is no longer covered under an HDHP), he or she can still use accumulated HSA funds to pay for qualified medical expenses on a tax-free basis.
- HSAs are an inheritable asset. If a surviving spouse is the beneficiary, the spouse becomes the owner of the account and can use it as if it were his or her own HSA. For other beneficiaries, the account will no longer be treated as an HSA, and will pass to a beneficiary or become part of the deceased individual’s estate.
- HSAs can help individuals become better health care consumers by giving them more of a stake in controlling their health care costs. Since they are responsible for more out-of-pocket costs due to the higher deductible, many employees become more conscious of the health care dollars they are spending.
- HSAs are not for everyone. The decision of whether to choose HSA/HDHP coverage is different for each individual, and may depend on the predictability of health care costs. If an individual is generally healthy and/or has a reasonable idea of health care costs, then HSA/HDHP coverage may make more financial sense than traditional health plan coverage.
HSA Annual Limits
Single Coverage
- HDHP minimum deductible: $1,400 - 2023 limit: $1,500
- HDHP out-of-pocket maximum: $7,050 - 2023 limit: $7,500
- HSA maximum contribution: $3,650 - 2023 limit: $3,850
Family Coverage
- HDHP minimum deductible: $2,800* - 2023 limit: $3,000
- HDHP out-of-pocket maximum: $14,100 - 2023 limit: $15,000
- HSA maximum contribution: $7,300 - 2023 limit: $7,750
*For family plans that have deductibles both for the family as a whole and for individual members: If either the family deductible or the deductible for an individual member is less than the minimum required deductible, then the plan is not an HDHP.
Catch-up Contributions
Individuals who are 55 years old and older are allowed to contribute an extra $1,000 per year to their HSA, to help them save for retirement.
Flexible Spending Accounts
A flexible spending account (FSA) is an account in an employee’s name that reimburses the employee for qualified health care or dependent care expenses. It allows an employee to fund qualified expenses with pre-tax dollars deducted from the employee’s paychecks. The employee can receive cash reimbursement up to the total value of the account for covered expenses incurred during the benefit plan year and any applicable grace period.
“Use-it-or-lose-it” Rule
As required by the Internal Revenue Service (IRS), an FSA has a “use-it-or-lose-it” provision stating that any unused funds at the end of the plan year (plus any applicable grace period) will be forfeited. When electing an FSA during open enrollment, the employee must specify how much he or she would like to contribute to the FSA for the year. The goal is to choose an amount that will cover medical or dependent care expenses, but that is not so high that the money will be forfeited at the end of the year.
The IRS allows employers to offer an extended deadline, or grace period, of 2 ½ months* after the end of a plan year to use FSA funds. Thus, for a plan year ending Dec. 31, employees would have until March 15 to spend the funds in their FSAs. This provision is strictly optional; the employer must choose to implement it.
In addition, employers may allow participants to carry over up to $570* in unused funds into the next year, for the 2022 plan year. Similar to the grace period rule, this carry-over rule is strictly optional, and employers must choose to implement it. The carry-over provision is only available if the plan does not also incorporate the grace period rule.
Types of FSAs
There are two different types of FSAs: health care accounts and dependent care accounts. An employee can elect to have both types of accounts and contribute separate pre-tax dollars to each. These accounts are kept separate; for instance, an employee could not be reimbursed for dependent care expenses from his or her health care account.
Health Care Accounts
A health care FSA reimburses employees for eligible medical expenses, up to the amount contributed for the plan year. A health care FSA offered through a cafeteria plan must limit the amount of salary reduction contributions that employees can make.
For 2022, the contribution limit is $2,850.
A health care FSA only reimburses employees for money spent on medical care, as defined under Section 213(d) of the Tax Code. Section 213(d) of the Tax Code defines “medical care” to include amounts paid “for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.”
Examples of qualified medical expenses include deductibles and copayments for an individual’s health plan. Eye exams, eyeglasses, contact lenses, hearing exams, hearing aids, physical exams and smoking cessation programs are also covered. For a complete list of qualified medical expenses, visit the IRS website.
Dependent Care Accounts
The second type of FSA is a dependent care account. This account can be used to pay for care of dependent children under the age of 13* by a babysitter, day care center, or before- or after-school program. Care for a disabled spouse, parent or child over the age of 12 is also eligible for reimbursement.
Many of the same general rules that apply to health care FSAs also apply to dependent care accounts, such as the “use it or lose it” rule. However, there are some other important differences between the two types of accounts. For dependent care accounts:
- There is an annual limit as to how much an employee can contribute. This amount is $5,000, or, if lower, the maximum amount that can be excluded from the employee’s income under Section 129 of the Tax Code when the employee’s election is made;
- The American Rescue Plan Act temporarily raises pre-tax contribution limits for a DCAP for calendar year 2021. For this calendar year, a married employee who files a joint tax return or an unmarried employee may place up to $10,500 in a DCAP. A married employee who files a separate tax return may place up to $5,250 in a DCAP.
- The money in a dependent care account is not available until it has been deposited by the employee; and
- Dependent care expenses cannot be reimbursed until they are actually incurred. This can be an issue when child care centers “pre-bill” for services, and employees are required to pay in advance.
For more information on FSA plan design and compliance, contact Paradigm Consulting today.
*Due to the COVID-19 pandemic, the IRS provides flexibility to employers offering FSAs or dependent care assistance programs. These flexibilities allow employers to:
- Provide flexibility for the carry-over of unused amounts from the 2020 and 2021 plan years;
- Provide flexibility to extend the permissible period for incurring claims for plan years ending in 2020 and 2021, allowing employers to extend the grace period to 12 months;
- Provide flexibility to adopt a special rule regarding post-termination reimbursements from health FSAs, which allows employers to permit employees who cease plan participation during 2020 or 2021 to continue to receive reimbursements from unused amounts through the end of the plan year in which their participation ended;
- Provide flexibility for a special claims period and carry-over rule for dependent care assistance programs when a dependent "ages out" during the COVID-19 public health emergency. For purposes of determining dependent care assistance that may be paid or reimbursed, the maximum age is increased from 13 to 14 years of age; and
- Allow certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.
HSA/HDHP Limits Increase for 2023
On April 29, 2022, the IRS released Revenue Procedure 2022-24 to provide the inflation-adjusted limits for health savings accounts (HSAs) and high deductible health plans (HDHPs) for 2023. The IRS is required to publish these limits by June 1 of each year. These limits include:
- The maximum HSA contribution limit;
- The minimum deductible amount for HDHPs; and
- The maximum out-of-pocket expense limit for HDHPs.
These limits vary based on whether an individual has self-only or family coverage under an HDHP.
Eligible individuals with self-only HDHP coverage will be able to contribute $3,850 to their HSAs in 2023, up from $3,650 in 2022. Eligible individuals with family HDHP coverage will be able to contribute $7,750 to their HSAs in 2023, up from $7,300 in 2022. Individuals age 55 or older may make an additional $1,000 “catch-up” contribution to their HSAs.
The minimum deductible amount for HDHPs increases to $1,500 for self-only coverage and $3,000 for family coverage in 2023 (up from $1,400 for self-only coverage and $2,800 for family coverage in 2022). The HDHP maximum out-of-pocket expense limit increases to $7,500 for self-only coverage and $15,000 for family coverage in 2023 (up from $7,050 for self-only coverage and $14,100 for family coverage in 2022).
The IRS also provided the 2023 contribution limit for excepted benefit health reimbursement arrangements (HRAs). For plan years beginning in 2023, the maximum amount that may be made newly available for an excepted benefit HRA is $1,950.
Notice of Benefit and Payment Parameters for 2023
On April 28, 2022, the Department of Health and Human Services (HHS) filed its final Notice of Benefit and Payment Parameters for 2023. This final rule describes benefit and payment parameters under the Affordable Care Act (ACA) that apply for the 2023 benefit year.
Finalized standards in the rule include:
- Updated annual limitations on cost sharing—The finalized 2023 maximum annual limit on cost sharing is $9,100 for self-only coverage and $18,200 for other-than-self-only coverage.
- The individual mandate’s affordability exemption—The finalized 2023 required contribution percentage is 8.17%.
- Standardized plan options in the Exchanges—Insurers in the federally facilitated Exchanges (FFEs) and state-based Exchanges using the federal platform (SBE-FPs) must offer certain standardized plan options beginning with the 2023 plan year.
HHS did not adopt standards for qualified health plans, states and Exchanges that prohibit discrimination based on sexual orientation and gender identity in benefit design and insurer marketing practices. Instead, HHS deferred finalizing these provisions to future rulemaking on ACA Section 1557.
A fact sheet on the rule is also available.
This Benefits Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice.
