IRS Indexes 2023 FSA, Commuter, HCE, Key, and Other Limits

In Revenue Procedure 2022-38 and Notice 2022-55, the IRS sets forth a variety of 2023 adjusted tax limits. While there are many useful provisions included such as the adoption credit and retirement plan contribution limits, we are focusing this alert on the significant increases to employee contribution limits for health flexible spending arrangements (FSAs), qualified transportation fringe benefits, and thresholds for highly compensated employees (HCEs) and key employees.

• The limit on annual employee contributions toward health FSAs for 2023 is $3,050, with the ability to carryover up to $610 to the following FSA plan year that begins in 2024.
• The limit on monthly contributions toward qualified transportation and parking benefits for 2023 is increased to $300.
• For 2023, the threshold for identifying a highly compensated employee (HCE) is $150,000 and key employee is $215,000.

We have a table of numerous 2023 limits here for your convenience.  This includes affordability targets, HSAs, and more.

Health FSAs

The annual contribution limit of $3,050 for health FSAs applies specifically to employee contributions: The same limit applies for general-purpose and limited-purpose health FSAs. Employer contributions are not subject to the limit, but are subject to different restrictions under other rules.

Employee health FSA contributions subject to the $3,050 annual limit include:

1. Amounts deducted pre-tax from an employee’s compensation through a cafeteria plan; and
2. Employer flex credits that the employee has the option to use toward cash or other taxable benefits.

Employees may elect up to $3,050 even if they’ve carried over up to $570 from the previous plan year. In addition, employees who join mid-plan year may still elect up to $3,050 for the remainder of the plan year. The limit applies per employee, rather than on a household basis, so if both spouses are employed and eligible for health FSA coverage, each spouse could contribute up to $3,050 for 2023. Finally, the limit applies on a per employer basis so long as the two employers are unrelated (i.e., not part of a controlled group or affiliated service group due to common ownership or shared services). In other words, an individual eligible for a health FSA under two separate employers, whether simultaneously or at different times during the same plan year, may elect up to $3,050 under each employer’s health FSA so long as the two employers are not part of a controlled group or affiliated service group.

Employer health FSA contributions may be made in addition to the $3,050 allowed for employee contributions. However, a health FSA must satisfy the following two conditions in order to meet “excepted benefit” status and avoid violating health care reform requirements:

• Maximum Benefit Condition. The maximum employer contribution to the health FSA of any participant cannot exceed the greater of:
  1. (i) 1x the participant’s salary reduction election; or
  2. (ii) $500.
  • In other words, the employer can contribute up to $500 safely to anyone’s FSA even if the employee contributes little or nothing, or the employer can contribute up to a 1-to-1 match of the employee’s contribution (e.g., if matching at the maximum 1-to-1 ratio, then the employer could contribute up to $3,050 to the health FSA of someone contributing $3,050 from their own paychecks for 2023, giving them a maximum FSA of $6,100).
• Availability Condition. The health FSA should only be available to employees that are eligible for the employer’s other non-excepted group health plan coverage (e.g., major medical coverage).
  • So those eligible for the FSA must be eligible for the group medical plan (but they do not have to be enrolled in it in order to enroll in the FSA).

The combination of employee and employer contributions elected for the plan year must be made available throughout the plan year to reimburse qualifying medical expenses, even if the amounts have not yet been contributed (the “uniform coverage” rule). If an employee exhausts the funds and then terminates participation mid-plan year, the employer cannot request repayment. However, if the employee does not incur enough expenses during the plan year to exhaust the amounts contributed, the employee will forfeit the remaining balance (the “use-or-lose” rule) subject to any grace period or carryover provision in place for the plan. Plans can have up to a 2 1/2-month grace period or carryover of up to $610, but never both.

FSAs are also subject to non-discrimination testing to ensure they do not discriminate in favor of HCEs and key employees.  Pass-through entity owners are not eligible to participate in pre-tax plans such as an FSA, so they are not included in such testing as they’re excluded from the plan altogether.

NOTE: The extended grace period (up to 12 months) and expanded carryover (uncapped) made available as COVID relief are limited to plan years ending in 2020 and 2021.

Qualified Transportation Fringe Benefits (Transportation & Parking)

Instead of annual contribution limits, qualified transportation fringe benefits are subject to monthly limits. The $300 monthly limit applies separately to: (a) qualified parking; and (b) the combination of commuter highway vehicles and transit passes. An employee could elect up to $600/month to use toward a combination of transportation and parking benefits. For qualified transportation fringe benefits, both employee and employer contributions count toward the monthly limit.

Just as contribution limits apply monthly, employees generally have the opportunity to change elections monthly (or even more frequently). Unused contributions cannot be cashed out, but they can be used in subsequent months. So if an employee fails to use all amounts contributed for qualified transportation or parking benefits and then terminates coverage, the leftover amounts would be forfeited. But if the employee continues participation in the plan, and perhaps reduces contributions for future months, unused amounts from one month may be used for coverage in later months (up to $300 in any given month).

IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.

This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.