The IRS has released the cost-of-living adjustment for the limit on permitted annual salary reduction contributions to health FSAs. The limit of $2,850 for taxable years beginning in 2022 has been increased to $3,050 for 2023. We are still waiting on most of the 2023 COLA for retirement plans, but expect those to be released in the near future and will be sure to provide an update as soon as possible.
Employers should review their cafeteria plan documents to determine if any change is necessary. A cafeteria plan must have language reflecting the cost-of living adjustment to permit employees to make the maximum permitted salary reduction without the plan needing to be amended. Although some plans are drafted to automatically adjust the cafeteria plan limit to match any cost-of-living adjustments in future plan years, other plans are drafted with a specific dollar amount. If your plan does not make an automatic change to increase the health FSA adjustment for future plan years, your plan document will need to be amended to permit your employees to put the additional $200 in their health FSAs for 2023. And even if your Plan is automatically increased for cost-of living adjustments, you will need to amend any references to this limit in other documents, such as your SPDs or election forms. With most calendar year end plans either in or approaching open enrollment, you will want to be sure to reflect your plan’s increased limit in all documents to enable your employees to be able to take advantage of the tax savings.