What are the Limits for 2023 Medical Flexible Spending Accounts?

If you participate in a medical flexible spending account (FSA) through your employer, you’ll be happy to know the contribution limit is increasing for 2023. The IRS recently announced cost-of-living adjustments that include a boost to the maximum amount you can contribute pre-tax to a medical FSA.

Understanding the new 2023 FSA limits can help you take full advantage of this valuable tax-savings benefit.

What is a Medical Flexible Spending Account?

A medical flexible spending account (FSA) is an employer-sponsored benefit that lets you set aside pre-tax money from your paycheck to pay for eligible healthcare expenses. The contributions you make to your medical FSA reduce your taxable income.

Some common eligible expenses include:

• Copays, deductibles, and coinsurance
• Prescription drugs and medications
• Dental work like cleanings, fillings, and braces
• Vision care including eye exams, glasses, and contacts
• Hearing aids and batteries
• Chiropractic care and acupuncture
• Mental health therapy and counseling

The money you contribute is deducted from each paycheck and deposited into your FSA. You can then use the funds anytime throughout the plan year to reimburse yourself for medical costs by submitting receipts and claims.

FSAs are a great way to save up to 30% on healthcare expenses by paying for them pre-tax. Your contributions lower your taxable pay, so you avoid paying income and payroll taxes on those dollars.

2023 Medical FSA Limits

For 2023, the IRS increased the maximum amount you can contribute to a medical FSA.

Here are the key 2023 FSA limits:

• Maximum Annual Contribution: $3,050 (increased from $2,850 in 2022)
• Maximum Carryover Amount: $610 (increased from $570 in 2022)

These new 2023 limits allow you to contribute more pre-tax money into your medical FSA and carry over more into the following plan year.

Details on the Increased 2023 Limits

Let’s take a closer look at the specifics around the new increased limits for medical FSAs in 2023.

$3,050 Maximum Contribution

The maximum amount you can contribute pre-tax to a medical FSA is increasing by $200 to $3,050 for 2023.

This limit applies to the total of your own pre-tax contributions plus any contributions your employer may make. The limit does not include employer contributions to a separate health reimbursement arrangement (HRA).

With the higher limit, you can now set aside more pre-tax money in your medical FSA to pay for healthcare expenses and reduce your taxable income.

For example, if you’re in the 22% tax bracket, contributing the max of $3,050 to your FSA saves you $672 on taxes (22% of $3,050).

$610 Maximum Carryover

If your employer offers a carryover on your medical FSA, the maximum amount you can roll over into the next year is increasing by $40 to $610 for plan year 2023.

The carryover allows you to roll unused FSA funds from one year into the next, rather than losing that money. Carryover provides more flexibility in using your FSA dollars.

For example, if you carry over $610 at the end of 2023, that money remains available in 2024 to reimburse eligible medical expenses along with your new 2024 contributions.

Not all employers offer FSA carryovers, so check your plan. But the $610 limit applies if your plan does allow funds to roll over.

No Change to Dependent Care FSA Limit

While the health FSA limit increased for 2023, the limit for dependent care flexible spending accounts (DCFSA) remains unchanged.

The maximum DCFSA contribution will continue to be $5,000 for 2023, or $2,500 if married filing separately.

A DCFSA is used to pay for eligible child or elder care expenses. The limit is not adjusted for inflation so it stays the same.

Ways to Maximize Your 2023 Medical FSA

Now that you can contribute more tax-free dollars to your medical FSA in 2023, here are some tips to make the most of this benefit:

• Contribute the full $3,050 – If you can afford it, contribute the maximum to gain the largest possible tax savings.

• Use for predictable expenses – Pay for planned medical expenses like braces, glasses, or elective surgeries from your FSA.

• Don’t overestimate – Make a reasonable estimate of your expected medical costs for the year so you don’t forfeit leftover funds.

• Check on carryover rules – See if unused funds can roll over to the next year or use up your balance by year-end.

• Replenish as needed – Check your balance periodically and increase contributions if your expenses exceed the estimate.

• Review eligible expenses – Certain over-the-counter medications and menstrual products are now eligible for FSA reimbursement.

• Use online tools – Your plan administrator likely offers online portals and mobile apps to easily manage your account.

Changes to Expect From Your Employer for 2023

If your employer provides a medical FSA as part of your benefits package, expect the following changes to align with the new 2023 limits:

• Updated plan communications and guides with the $3,050 contribution maximum

• Increased contribution amount options and flexibilities for 2023 enrollment

• Ability to carry over up to $610 if your plan offers carryover

• Coordination with your FSA third-party administrator on claim processing and reimbursements for increased limits

• Confirmation and notifications if your company decides to exceed the $3,050 maximum (although rare)

Reaching out to your benefits administrator can provide details on any 2023 FSA adjustments specific to your workplace plan.

The Benefits of Freeing Up Pre-tax Dollars

Increasing the amount of money you can divert pre-tax into savings and spending accounts leaves you more take-home pay in your paycheck.

If you participate in a medical FSA through work, be sure to take advantage of the $3,050 limit for 2023. Carefully estimating your expected healthcare expenses and contributing the maximum allowable amount can add up to significant tax savings.

With the cost of living rising, a medical FSA creates tax efficiency in paying for your healthcare needs. Plus any unused funds over $610 can now potentially roll over to the next year rather than being forfeited.

Thoroughly review your employer’s open enrollment materials for full details on the new 2023 limits and any other changes to your workplace medical FSA plan.