Written and medically reviewed by Dorcas Morak, Pharm.DThe two common healthcare tax-advantaged accounts - Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) - have a few changes for 2023. Here's what you need to know.
What is an FSA or HSA?
A Flexible Spending Account is a tax-advantaged account set for employees by the employer. Although an FSA is opened by the employer, it can be funded by both the employer and the employee – the account owner. You can use the account funds to pay for qualified expenses including medical and dental services. If your employer does not authorize carryover, your FSA is a use-it-or-lose-it account, meaning you lose the remaining funds at year’s end. You also lose the account if you change your employer.
A Health Savings Account (HSA) is a savings plan that is created and controlled by an individual. The account owner funds the account with money set aside before tax and uses it for qualified expenses such as co-pays, co-insurance, and medical expenses. Only employers (for their employees) and self-employed people with an HDHP can contribute to an HSA. You can carry over the remaining funds each year and retain the account after changing your employer.
What happens to my FSA or HSA when I change employers?
When you change your employer, you lose your FSA but still retain your HSA.
What is the contributing limit for 2023?
In 2023, the contributing limit for an FSA has increased to $3,050 from $2,850 in 2022. Also, the contribution for single workers who want to fund an HSA will be $3,850 – a 5.5% increase. Similarly, a family who funds an HSA account has a contributing limit of $7,750 – a 6.2% increase from 2022.
Can I enroll in both an FSA and HSA?
You can’t enroll in both an FSA and HSA for 2023. However, if you have an HSA, you can open a Limited Purpose Flexible Spending Account (LPFSA), which is only used for vision and dental expenses.
How much should I set aside for 2023?
Since FSAs are often use-it-or-lose-it accounts, you should calculate your out-of-pocket spending to determine the amount to set aside for 2023.
Why does the contribution cap increase each year?
The contribution limit is indexed to inflation. The larger-than-usual increase in contribution limit from 2022 to 2023 is due to the high inflation rate in 2022.
How much of my 2022 FSA can I roll over to 2023?
If your employers allow the rollover of unused FSA funds, you can roll over up to $610 in 2023 ($570 in 2022). The actual amount depends on your employer. This amount does not affect your normal contributing limit of $3,050.
How do HSA contributions affect your taxes?
Your HSA account provides a triple tax benefit: every dollar you contribute is tax deductible, all investment returns are tax-free, and withdrawal from the account is tax-free if used for qualified medical expenses.
Can I overfund my HSA?
You can overfund your HSA, but there may be consequences. If you exceed the contribution limit, you will pay an excess-contribution penalty: a 6% excise tax each year the money remains in your account.