The IRS is making major changes to FSAs and HSAs. Here’s what to know.

Employers typically offer an open enrollment period in the fall, when their employees are allowed to choose new health plans, enroll in a flexible spending account, or make other changes to their benefits. This year, there are a few changes ahead that could help employees, while also potentially opening up some financial pitfalls.

Among the biggest changes for 2023 are two tax-advantaged health savings accounts – Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA). These accounts can save a good chunk of change by allowing workers to withdraw pre-tax money to pay for medical expenses. Basically, you save what you would have paid in taxes on the money you put into the accounts.

In 2023, employees can withdraw as much as $3,050 in an FSA, a an increase of about 7% From the limit of $2,850 for the current tax year. Meanwhile, single workers who want to fund an HSA can save up to $3,850 next year, a 5.5% increase from 2022, while families can save up to $7,750 by 6.2%.

These hikes are helpful at a time when inflation is at its highest in four decades, with consumer prices rising more than 8% from a year ago. But there are several “gotchas” that workers need to be aware of, especially when it comes to flexible spending accounts, most importantly FSAs are “use-or-lose-it” programs. In other words, if you don’t use all the money you set aside, you’ll lose it — your employer keeps any unused money.

“Open enrollment typically opens in late October and early November,” said Lisa Myers, director of client services, benefits accounts, at Willis Towers Watson. “It’s important to plan carefully, and know the deadline.”

Indeed, according to an analysis by Money, American workers lose about $3 billion annually in unused FSA funds.

Here’s what to keep in mind during open enrollment.

What is the difference between FSA and HSA?

Both accounts are intended to help workers pay for medical expenses with pre-tax money. The biggest difference is that FSAs are controlled by your employer, whereas HSAs are owned by the individual.

This means that if you leave your job, your FSA will not carry over with you. But once you open and fund an HSA, that account remains with you, like your 401(k), that remains yours even after you leave your job and start at a new employer.

Another big difference: Health savings accounts are designed for people with high-deductible health care plans. This means that not every employee will have access to an HSA.

HSAs generally have more flexibility than FSAs. For example, unused funds are rolled over each year, unlike an FSA, where the money is forfeited if your employer’s claim is not used by the deadline. And you can change your contribution to your HSA at any time; With an FSA, contributions are determined during open enrollment.

β€œThe funds in this account go on a pre-tax basis, they can grow over time, including being invested, and they are also tax-free as long as they are ultimately used on medical expenses. ,” Stephen Durso, Willis Towers Watson, associate director of profit accounts, told CBS News.

“So that kind of triple-tax savings benefit is really unmatched, depending on the types of accounts available. If you have an HSA available, it’s really an attractive option for you,” he said.

Can I enroll in both an FSA and an HSA?

Generally, no, noted Myers of Willis Towers Watson. However, people with an HSA can opt for a slimmed-down version of a flexible spending account, known as a “limited purpose FSA.” These accounts can only be used for vision and dental expenses, reducing their usefulness.

That means employees who qualify for both programs will generally need to decide whether it makes more sense to fund an FSA or an HSA for 2023.

How much should I set aside for 2023?

Myers said some employers provide tools to help workers estimate their potential annual health costs, but you can also look at your out-of-pocket medical expenses for the past year to see what’s coming for the coming year. To estimate your potential expenditure.

People with an HSA may also want to set aside the amount they would pay as a deductible due to their health plan, as that is an out-of-pocket expense that they can reimburse through that tax-advantaged account.

For those who are choosing an FSA, there’s more at stake, because overestimating your medical expenses can leave money in your account that eventually goes back to your employer.

What time frame should I be aware of?

You will need to stay on top of the deadline for claiming your FSA funds.

Employers can give employees a grace period of up to two and a half months after the end of a calendar year to claim the money. But you need to check if your company provides additional times and marks on your calendar when you will need to claim the money.

Some workers may be surprised by this year’s deadline as a pandemic stimulus bill and the IRS eased rules for claiming FSA funds, giving people more time to file claims in 2020 and 2021. But those provisions have expired, meaning people with an FSA must claim their money until 2022, the end of the year, or the employer’s grace period in early 2023.

“This was temporary relief because of the pandemic, so workers’ health and dependent care may have larger than normal balances in FSAs, and they could go into 2023,” Myers said. “It’s important to check your balance, check the planning rules, so that they can plan their spending for the remainder of 2022.”

What can I spend my FSA money on?

Myers said employees sometimes wonder what their FSA plans will cover, which include Band-Aids, reading glasses, first aid kits and over-the-counter medications.

She recommends that people check out, which has all the FSA-eligible items, especially if you’re approaching the deadline to claim your funds and need to access the funds.

Myers also recommends that you check your 2022 FSA balance and claim deadline instead of waiting until the end of the year. In general, a healthcare or item must be purchased in 2022 to qualify for a 2022 FSA claim, so attempting to spend money until the last minute could increase your risk of running into an obstacle – such as your eye doctor. booked up, which could hinder renewing your prescription to get new glasses.

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