IRS Announces Changes to FSAs and HSAs
(RightWing.org) – It’s that time of year again. Most employers have either started or are about to open the period of open enrollment for health care plans and other benefits. Many people participate in Flexible Spending Accounts (FSA) or Health Savings Accounts (HSA). As you plan for 2023, the Internal Revenue Service (IRS) recently announced some changes to accounts.
The two health savings accounts can save you money if they are used correctly. When you participate in one of them, the government allows you to save pre-tax for medical expenses. Thanks to four-decade-high inflation rates, the IRS is offering increased contribution limits. Still, you should know how both plans work and the pitfalls that could come with them.
IRS Increases Tax-Free Contributions to FSAs and HSAs
In two separate announcements, the IRS noted that taxpayers could put away more money for their health needs tax-free in FSAs and HSAs. In 2023, employees can sock away in an FSA as much as $3,050 — a 7% increase over 2022, which was $2,850.
Single workers who have a high-deductible health insurance plan save up to $3,850 in an HSA. That’s a 5.5% increase from 2022. Families will be able to contribute $7,750, which is 6.2% over 2022 contributions.
So, what are the differences between the accounts?
An FSA is a use-it-or-lose-it account. It allows employees to set aside a specific amount of money each year, but it also must be spent on IRS-qualified healthcare expenses by the end of the year. Any remaining balance is forfeited.
An HSA is similar, but it’s used as a long-term account. Only those with high-deductible insurance plans qualify to participate. A core difference between an HSA and FSA is that once an HSA account is established, the owner can contribute however much they want at any time, up to the maximum amount.
Pitfalls That Come With FSAs
Not only is an FSA a use-it-or-lose-it, but it also doesn’t belong to the employee. Instead, the employer is the owner. If unused funds are in the account, or if you leave the company, the money stays with the business. Every year, approximately $3 billion in untapped FSA accounts is forfeited by employees to employers. Still, many aren’t aware they can use an FSA plan to buy simple things like Band-Aids, first-aid kits, or even over-the-counter medications.
If you have an HSA, the money in it belongs to you. It’s portable and can be used with another employer. In addition, HSA values roll over annually, unlike FSA plans. It can be invested, but it must ultimately be spent on healthcare expenses to retain its tax-free status.
Which one works best for you is a personal choice based on your unique situation.
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