Just announced, the contribution limits are increasing for 2023!
It’s that time of year when companies hold an open enrollment period allowing employees to select or change their benefits. This is an ideal opportunity to review medical benefits and allocate an amount for next year to a Flexible Spending Account (FSA) or Health Savings Account (HSA). Plus, the contribution amount is going up for 2023 thanks to inflation. If you find these accounts and rules confusing, like many do, keep reading.
What is an FSA?
The FSA is an employer-provided benefit that offers a tax-advantaged way to save and pay for medical expenses that are considered qualified in a calendar year. Funds contributed to the account come directly from your earnings before taxes, lowering your taxable income. You do not pay taxes on distributions either.
For 2022, the contribution limit is $2,850 and for 2023 it will be $3,050. At the end of a calendar year, money in an FSA is lost if not used, although some employers offer an additional grace period for using funds.
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What is an HSA?
The HSA is a tax-advantaged account available to those who have a high-deductible health plan, which is defined as one with a deductible of at least $1,400 for an individual or $2,800 for a family. This account helps to save and pay for qualified medical expenses. Funds contributed to this account may also be invested and grow tax-deferred, and withdrawn without penalty, as long as the funds are used for qualified medical expenses.
For 2022, the maximum contributions are $3,650 for individuals or $7,300 for families, and in 2023 it will be $3,850 for individuals and $7,750 for families. HSA account funds can be rolled over into a new year.
You may be wondering if you can have both account types. Traditional FSAs are not compatible with HSAs, meaning that if you have enrolled in an FSA, you won’t be eligible for the HSA too. If your employer has offered a limited-purpose FSA or post-deductible FSA, then you may also have an HSA. Again, HSAs are only available if you have a high-deductible medical plan.
Spouses vs. domestic partners
Now, what if you’re in a domestic partnership or marriage? As far as HSA’s go, individuals can only reimburse their own medical expenses, or a spouse or tax dependent’s expenses. So domestic partners or ex-spouses would not be covered. However, a domestic partner or ex-spouse, if covered by your medical plan, may open a separate HSA to which you may contribute.
FSA accounts follow the same rules in that there must be a legal marriage to use FSA account funds and domestic partners would not qualify for reimbursements. Also, if you have a spouse enrolled in a general-purpose FSA plan and a non-high-deductible plan under which you’re covered, then you as the other spouse may not contribute to an HSA.
To maximize benefits, married couples may choose to open two separate HSA accounts. If each spouse has a high-deductible health plan with their employer, spouses may sign up for accounts separately, as coverage and premiums may be lower, and each spouse can take advantage of contributions.
However, the total family limit per year must be combined and not be exceeded. If each spouse is 55 years or older, each spouse may also take advantage of the $1,000 catch-up allowed. There is no such thing as a joint HSA. It is more complicated if both spouses work for the same employer, as two spouses may not contribute individually to HSAs.
Coverage for adult children
You might be wondering, what about adult children? Once children are no longer considered dependents, you can no longer use HSA dollars to pay for their expenses. However, children can open their own HSA accounts and if they are covered medically under a family plan, they can contribute up to the maximum allowed for the family. FSA dollars can typically be used to cover adult children on your medical plan, regardless of whether they are your tax dependent or not, as long as they are not older than 26.
FSA and HSA accounts can be smart additions to your overall financial plan. They can be good resources to save some money and increase savings, as well as prepare for the future. The money allocated can come in handy, especially when the unexpected happens. If you have questions, it’s always a good idea to work with your financial professional who has a holistic view of your financial situation.
If you have questions about your financial plans going into the New Year, or if you would like your current financial plan reviewed, schedule an appointment on Bayntree’s online calendar by selecting the date and time that is most convenient for you! You can also always reach us by emailing info@bayntree.com.
Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.
