The IRS is making big changes to FSAs and HSAs. Here's what to know.
Employers typically offer a period of open enrollment in the fall, when their workers are allowed to pick new health plans, enroll in a Flexible Spending Account or make other changes to their benefits. This year, there are some changes ahead that could help employees, while also potentially opening up some financial pitfalls.
Among the biggest changes for 2023 concern two tax-advantaged health savings accounts: Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA). These accounts can save workers a nice chunk of change by allowing them to sock away pre-tax money to pay for medical expenses. Basically, you save what you would have paid in taxes on money you put in the accounts.
In 2023, employees can put away as much as $3,050 in an FSA, an increase of about 7% from the current tax year's cap of $2,850. Meanwhile, single workers who want to fund an HSA can save up to $3,850 next year, a 5.5% increase from 2022, while families can save up to $7,750, up 6.2%.
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Those increases are helpful at a time when inflation is at it highest in four decades, with consumer prices having jumped more than 8% from a year ago. But there are several "gotchas" that workers need to be aware of, especially when it comes to Flexible Spending Accounts, with the foremost being that FSAs are "use-it-or-lose-it" programs. In other words, if you don't use all the money you set aside, you'll lose it — your employer keeps any unused funds.
"Open enrollment typically opens in late October and early November," said Lisa Myers, director of client services, benefits accounts, at Willis Towers Watson. "Planning carefully is important, and knowing the deadlines."
Indeed, U.S. workers end up forfeiting a total of about $3 billion a year in unused FSA funds, according to an analysis from Money.
Here's what to consider during open enrollment.
What's the difference between an FSA and HSA?
Both accounts are aimed at helping workers pay for medical expenses with pre-tax money. The biggest difference is that FSAs are controlled by your employer, while HSAs are owned by the individual.
That means that if you leave your job, your FSA won't move with you. But once you open and fund an HSA, that account does stay with you, like your 401(k), which continues to be yours even after you leave a job and start at a new employer.
Another big difference: Health Savings Accounts are designed for people with high-deductible health care plans. This means that not every employee will have access to an HSA.
HSAs generally have more flexibility than FSAs. For instance, unused funds roll over each year, unlike with a FSA, where funds are forfeited if not used by your employer's claim deadline. And you can change your contributions to your HSA at any time; with a FSA, contributions are set during open enrollment.
"Funds go into this account on a pre-tax basis, they can grow over time, including be invested, and as long as they're eventually used on medical expenses is also tax free," Stephen Durso, associate director of benefit accounts at Willis Towers Watson, told CBS News.
"So that kind of triple-tax savings benefit is really unmatched based on the available types of accounts. If you have an HSA available, it really is an attractive option for you," he added.
Can I enroll in both an FSA and HSA?
Generally, no, noted Myers of Willis Towers Watson. However, people with HSAs can opt for a slimmed-down version of a Flexible Spending Account, known as a "limited purpose FSA." These accounts can only be used for vision and dental expenses, which shrinks their usefulness.
That means employees who qualify for both programs will generally need to decide whether it makes more sense to fund either an FSA or an HSA for 2023.
How much should I set aside for 2023?
Some employers offer tools to help workers estimate their potential annual health costs, but you can also look at your out-of-pocket medical expenses for the past year to help gauge your likely expenditures for the upcoming year, Myers said.
People with HSAs also may want to set aside the amount that they'll pay due to their health plan deductible, since that's out-of-pocket spending that they could get reimbursed through that tax-advantaged account.
There's more at stake for people who are opting for FSAs, since overestimating your medical expenses could leave money sitting in your account that eventually returns to your employer.
What deadlines should I be aware of?
You'll need to stay on top of the deadline for claiming your FSA funds.
Employers can give employees a grace period of up to two and a half months after the end of a calendar year to claim the money. But you'll have to check if your company offers extra time and mark on your calendar when you'll need to claim the money by.
Some employees may be surprised by deadlines this year because a pandemic stimulus bill and the IRS relaxed the rules for claiming FSA funds, providing more time for people to file claims in 2020 and 2021. But those provisions have expired, which means people with FSAs in 2022 must claim their money by year-end or by an employer's grace period in early 2023.
"That was temporary relief due to the pandemic, so employees may have larger than usual balances in their health and dependent-care FSAs, and that they may forfeit going into 2023," Myers said. "It's important to check your balances, check the plan rules, so they can plan their spending for the remainder of 2022."
What can I spend my FSA money on?
Employees are sometimes surprised at what their FSA plans will cover, including Band-Aids, reading glasses, first-aid kits and over-the-counter medicine, Myers said.
She recommends that people check the FSAStore.com, which carries all FSA-eligible items, especially if you are getting close to your deadline for claiming your funds and need to use the money.
Myers also advises that you check your 2022 FSA balance and claim deadlines now, rather than waiting until the end of the year. Generally, a health service or good must be purchased in 2022 to qualify for a 2022 FSA claim, so waiting until the last minute to try to spend the funds could increase your risk of running into a barrier — such as if your eye doctor is booked up, which could hinder renewing your prescription to get new glasses.