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 some upcoming changes that could help employees, while potentially opening 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 workers a nice amount of money by allowing them to save pre-tax money to pay for their medical expenses. Basically, you save what you would have paid in taxes on the money you put into the accounts.
In 2023, employees can set aside up to $3,050 in an FSA, athe current tax year limit of $2,850. Meanwhile, single workers looking 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. , up 6.2%.
The increases come in handy at a time when inflation is at its highest level in four decades, with consumer prices jumping more than 8% from a year ago. But there are several “gotchas” that workers should be aware of, especially when it comes to flexible spending accounts, the most important being that FSAs are “use it or lose it” programs. In other words, if you don’t use all the money you’ve set aside, you’ll lose it — your employer keeps the unused funds.
“Open enrollment typically opens in late October and early November,” said Lisa Myers, director of client services, employee benefit accounts, at Willis Towers Watson. “It is important to plan carefully and know the deadlines.”
Indeed, American workers end up losing a total of about $3 billion a year in idle FSA funds, according to a Money analysis.
Here’s what to consider when registering open.
What is the difference between an FSA and an HSA?
Both accounts aim to help workers pay for their medical expenses with pre-tax money. The biggest difference is that FSAs are controlled by your employer, while HSAs are owned by the individual.
This means that if you quit your job, your FSA will not move with you. But once you open and fund an HSA, that account stays with you, like your 401(k), which continues to be yours even after you leave a job and start with a new employer.
Another big difference: health savings accounts are designed for people with high-deductible health plans. This means that not all employees will have access to an HSA.
HSAs generally have more flexibility than FSAs. For example, unused funds roll over each year, unlike an FSA, where funds are forfeited if not used by your employer’s claim deadline. And you can change your HSA contributions at any time; with an FSA, dues are set at open enrollment.
Can I register for both an FSA and an HSA?
Generally, no, noted Myers of Willis Towers Watson. However, people with HSAs can opt for a slimmed-down version of a flexible spending account, known as a “limited-use FSA.” These accounts can only be used for vision and dental expenses, which reduces their usefulness.
This means that employees who qualify for both programs will generally have to decide whether it makes more sense to fund an FSA or an HSA for 2023.
How much should I set aside for 2023?
Some employers offer tools to help workers estimate their potential annual health costs, but you can also view your medical expenses for the past year to help you assess your likely expenses for the coming year, Myers said.
Individuals with HSAs may also want to set aside the amount they will be paying due to their health plan deductible, as these are reimbursable expenses that they could get reimbursed through this tax-advantaged account. .
There’s more at stake for people who opt for FSAs, as overstating your medical bills could leave money in your account that will eventually go to your employer.
What deadlines should I pay attention to?
You will need to meet the deadline to claim 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’ll need to check if your company offers overtime and mark on your calendar when you need to claim the money.
Some employees may be surprised by the delays this year because a pandemic stimulus bill and the IRS have relaxed rules for claiming FSA funds, giving people more time to file claims in 2020 and 2021. But those provisions have expired, meaning people with FSAs in 2022 must claim their money before the end of the year or before the employer’s grace period in early 2023.
“This was temporary relief due to the pandemic, so employees can have larger than usual balances in their health and dependent care FSAs, and can waive until 2023,” Myers said. “It’s important to check your balances, check the rules of the plan, so they can plan their spending for the rest of 2022.”
What can I spend my FSA money on?
Employees are sometimes surprised at what their FSA plans will cover, including bandages, reading glasses, first aid kits and over-the-counter medications, Myers said.
She recommends people check out FSAStore.com, which has all the FSA-eligible items, especially if you’re nearing your deadline to claim your funds and need to use the money.
Myers also advises that you check your 2022 FSA balance and claim deadlines now, rather than waiting until the end of the year. Generally, a healthcare service or good must be purchased in 2022 to be eligible for a 2022 FSA claim, so waiting until the last minute to try and spend the funds could increase your risk of hitting a snag – like if your ophthalmologist is reserved which could hinder the renewal of your prescription to obtain new glasses.