Understanding FSA Limits: A Detailed Guide for Employers and Employees

Employers seeking to offer comprehensive benefits to attract and retain top talent often explore options beyond just the standard health and retirement plans. In this endeavor, the Flexible Spending Account (FSA) emerges as a highly favorable tool. Not only does it enable employees to save money and manage their healthcare costs, but it also has distinct implications for payroll taxes that benefit the employer. Understanding FSA limits is crucial in leveraging its advantages without stumbling over compliance.

What Is a Flexible Spending Account (FSA)?

An FSA is a special account that allows employees to set aside pre-tax dollars for qualified medical expenses. This can range from deductibles and copayments to prescription medications and certain medical equipment. What sets an FSA apart from other health care financial options is its “use-it-or-lose-it” rule—unused funds typically do not roll over at the end of the plan year, with certain limited exceptions. This makes understanding the contribution limits and planning one’s FSA contributions all the more important.

The Ceiling: FSA Contribution Limits

For the year, the IRS sets a cap on how much an employee can contribute to their FSA. This limit is periodically reviewed and may be adjusted for inflation. For example, the FSA limit for 2023 is $2,850. It is important to note that this limit applies per employer—if a person works for multiple employers, they may have a separate FSA with each one.

The Ground Rules: Types of FSAs and their Specifics

There are two primary types of FSAs – a Healthcare FSA for medical expenses, and a Dependent Care FSA that can be used for certain childcare or adult dependent care expenses.

Healthcare FSAs:

  • For qualifying medical, dental, and vision expenses.
  • Can include over-the-counter medications and menstrual care products.
  • May allow a carryover of up to $570 or a grace period extension, depending on the employer’s plan specifics.

Dependent Care FSAs:

  • For expenses related to the care of eligible dependents so the employee (and spouse, if married) can work.
  • The limit is $5,000 for a household or $2,500 for a married individual filing separately.
  • Does not generally allow carryover of funds.

What It Means for Employers

For employers, offering an FSA can make your benefit packages more attractive and competitive. Here are some key considerations:

  • Tax Benefits: Contributions are pre-tax, reducing the amount of payroll taxes owed by both the employee and the employer.
  • Compliance: Employers must ensure they adhere to the maximum contribution limits set by the IRS and inform their employees of any changes.
  • Recordkeeping: Employers should keep meticulous records of employee contributions and claims against their FSAs to ensure compliance with IRS regulations.
  • Communicating Changes: When FSA limits are updated, employers are responsible for updating their plans and notifying employees to adjust their contributions.

What It Means for Employees

For employees, an FSA is a valuable financial tool that requires careful management:

  • Tax Savings: Contributions lower taxable income, which can result in tax savings.
  • Budgeting for Medical Costs: Allows employees to set aside funds in anticipation of known medical costs, easing financial strain.
  • Planning: Understanding FSA limits helps employees plan their healthcare expenses without over-funding the account.
  • Awareness of Deadlines: Employees should stay mindful of the “use-it-or-lose-it” rule to ensure they don’t forfeit unused funds at year-end.

Balancing Contributions with Anticipated Medical Expense

A key strategy for employees is to estimate their annual medical expenses before committing to an FSA contribution. The goal is to save enough to cover expected costs without significantly overestimating and risking loss of funds. Employers can facilitate this process through educational tools and consultations during the benefits enrollment period.

Navigating Special Situations

Life events such as marriage, birth, or job changes can impact one’s FSA. It’s important to recognize these qualifying events may allow adjustments to FSA contributions mid-year. Employees should consult their HR department to understand how such changes can be reflected in their FSA contributions.

Conclusion

Understanding FSA limits is paramount for both employers and employees to make informed decisions regarding healthcare expenditure. While it offers attractive tax advantages and helps in planning out-of-pocket medical costs, it also requires diligence to avoid pitfalls associated with the “use-it-or-lose-it” nature of these accounts. By keeping abreast of the latest IRS updates and strategizing contributions based on personal needs, FSAs can significantly alleviate the financial burden of healthcare expenses. For employers, it is a balancing act of ensuring compliance, providing employee support, and maintaining competitive benefits—solidifying their position as employers of choice in today’s job market.

About the Author:

Picture of Kyle Bolt
Kyle Bolt, the founder of Crew HR - Simple HR Software, brings a wealth of expertise with over 15 years in Human Resources. Kyle has dedicated his career to building high-performing teams and fostering workplace cultures that drive business success. His hands-on experience has made CrewHR a trusted partner for businesses looking to simplify and streamline their HR processes.
Picture of Kyle Bolt
Kyle Bolt, the founder of Crew HR - Simple HR Software, brings a wealth of expertise with over 15 years in Human Resources. Kyle has dedicated his career to building high-performing teams and fostering workplace cultures that drive business success. His hands-on experience has made CrewHR a trusted partner for businesses looking to simplify and streamline their HR processes.

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