If you have a flexible spending account (FSA), expect to see a big change in 2023 that could help you save money on medical costs — provided you know how to make the most of it.
More than 30 million people are enrolled in employer-sponsored FSAs, to which employees contribute pre-tax dollars to pay for eligible healthcare costs, up to a maximum of $2,850 for 2022. The money in these accounts can be used to pay for a wide array of out-of-pocket health expenses, including copayments for doctor visits and prescriptions, over-the-counter medicines and medical devices. The amount you can contribute is determined by the IRS and is linked to inflation rates — which means the maximum is getting an unprecedented increase for 2023, rising to $3,050.
Experts generally recommend people take advantage of this benefit when possible, but FSAs do have a catch: Your contributions are use-it-or-lose-it, and that clause usually kicks in at the turn of the calendar year.
Employers can offer a grace period that gives you until March 15 to spend down the FSA or allow you to roll over some of the money into the new calendar year (but not both). And they’re not required to offer either one. The rollover maximum is determined by the IRS, and it’s indexed to inflation. That means the amount you can roll over next year (that is, from your 2023 balance into 2024) is going up to $610. This year, the maximum you can roll over is $570.
Where to spend down your FSA dollars
If you need to spend down an FSA balance before the end of the year, there are a number of resources you can use to find FSA-eligible products and services. There are also online retailers — The FSAstore.com is a major one, and Amazon also has an FSA Store — where you can shop for FSA-eligible items.
Even if you think you know what is covered, the government has added products and categories over the years, so take a fresh look. You might be surprised at how much you could save.
The CARES Act of 2020 expanded FSA-eligible expenses when it added over-the-counter medications and supplies including cold and allergy medicines, pain relievers, skin treatments and digestive aids, along with menstrual supplies.
“We’re almost two years in, but awareness of those things is still growing, and one of the reasons [besides inflation] you see the big contribution limit increase is because there’s more to buy,” says Zack Peckham, vice president of strategy at Health-E Commerce.
“When it comes to helping people spend down their balances, FSA administrators have gotten pretty clever about reducing the barriers,” says Jake Spiegel, a health and wealth researcher at the Employee Benefits Research Institute. More employers are issuing debit cards so people don’t have to pay out of pocket for eligible expenses and then file for reimbursement.
Unexpected FSA-eligible items
You might not think of condoms or birth control pills when you scout ways to spend down your FSA. but they're both eligible. So is sunscreen, as long as it has an SPF of at least 15. Skin care, such as light therapy devices for acne, can be purchased with FSA funds, and several foot care products also qualify.
How to plan your 2023 FSA contribution
\While it’s impossible to plan for breaking a leg or an emergency surgery, there are numerous eligible expenses that you can probably estimate with a reasonable degree of accuracy.
“Think about all the healthcare expenses that may be coming up in 2023 and see if they're considered qualified,” says Charlene Rhinehart, a personal finance expert and accountant at GoodRx. Look at your deductible and copay amounts for the new year, and calculate how many annual visits you make to doctors, add medications for chronic conditions or regular purchases, like disposable contact lenses, to come up with a baseline figure.
If you’re planning a surgery or having a baby next year, maxing out your contributions so you can pay some of those costs with pre-tax dollars is a no-brainer.
Since FSA contributions lower your income dollar for dollar, even if you don’t spend down your entire balance and have to forfeit some, you still get the tax benefits, says William Sweetnam, a legislative and technical director for the nonprofit Employers Council on Flexible Compensation. “You're getting a tax benefit for making the contribution, so if you forfeit a little bit, you're still much more making it up,” he says.
Check your FSA balance now
Experts worry that more people will be caught unawares this December because pandemic-related legislation that allowed employers to give people more leeway to spend down FSA contributions come to a close at the end of this year. Health-E Commerce, parent company of the FSA Store, conducted a survey that found roughly two-thirds of FSA contributors remain unaware of the changes coming at the end of this year.
Even before the pandemic, FSA contributors were leaving money on the table. A MONEY investigation found that workers forfeited a total of $7.2 billion in FSA contributions in 2019 and 2020. On average, workers lose between $339 and $408 per year because they miscalculate how much money they will spend on eligible expenses before the annual deadline.