You’re likely hearing about inflation in the news every day. And I bet you’re seeing the effects of your shrinking purchasing power at the cash register. Like so many others, I care about inflation because when prices rise for the things we all need to buy, every dollar we have buys less.
Benefits like Flexible Spending Accounts (FSAs) can help stretch every dollar and are powerful tools to help combat inflationary pressures. My team watches closely for any adjustments to IRS numbers; we know how the benefits we offer can help Americans put more money in their pockets. The new rates were very recently released. In most instances (but not all), these new limits are higher.
It can be a lot to digest, so I’ll help break down what you need to know about each contribution limit change so you can help your people make plans for the year ahead.
IRS releases tax year 2023 inflation adjustments
On October 18, 2022, the Internal Revenue Service issued the 2023 annual inflation adjustments for many tax provisions of the IRS Code.1
These adjusted amounts will be used to prepare tax year 2023 returns in 2024. Additionally, the new amounts will help members plan for how much money they can set aside during the calendar year to pay for qualified medical expenses.
Also, on October 21, the IRS released the dollar limitations for qualified retirement plans for tax year 2023, including 401(k) plans.2
Look at the charts below to find the information you need. You’ll see the new information in the 2023 columns. Historical rates are included so you can see the change.
Indexed Compensation Levels
As you determine how the information applies to your organization, here are the amounts that apply to Highly Compensated and Key Employee categories:
Retirement: 401(k), 403(b), or 457 Plans
Limitation on Health Flexible Spending Account (FSA) Salary Reductions
As a reminder, Healthcare FSAs that permit the carryover of unused amounts, the maximum carryover amount is increased to an amount equal to 20 percent of the maximum health FSA salary reduction contribution for that plan year.1
Dependent Care Assistance Program (DCAP)
*While the $5,000/$2,500 DCAP limit has not changed, the maximum amount of DCAP benefits permitted for income exclusion was temporarily increased to $10,500 (or $5,250 for married taxpayers filing separately) for the 2021 taxable year only and has returned to $5,000/$2,500 for 2022 and subsequent years unless Congress acts.3
There are adjustments to some of the general tax limits that are relevant to the federal income tax savings under a DCAP. These include the 2022 tax rate tables, earned income credit amounts, and standard deduction amounts. The child tax credit limits are also relevant when calculating the federal income tax savings from claiming the dependent care tax credit (DCTC) versus participating in a DCAP.
Adoption Assistance Exclusion and Adoption Credit
Health Savings Account (HSA)4
Excepted Benefit Health Reimbursement Arrangement (EBHRA)
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
Archer Medical Savings Account (MSA)
Information to help educate employers and plan sponsors
In some cases, the new limits represent fairly sizeable increases. You can use this information to plan for the year ahead and potentially identify opportunities to save or otherwise give a strained budget some relief. Whether the potential savings are used for retirement or qualified medical expenses now and in the future, it’s important to mention the context for this information.
The general summary I just walked through is intended to educate employers and plan sponsors on the potential effects of recent government guidance on employee benefit plans. This summary is not and should not be construed as legal or tax advice. The government’s guidance is complex and very fact-specific. As always, we strongly encourage employers and plan sponsors to consult competent legal or benefits counsel for all guidance on how the actions apply in their circumstances.
Nothing in this communication is intended as legal, tax, financial or medical advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations. Always consult a professional when making life-changing decisions.
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