The U.S. Internal Revenue Service announced increase to Individual Retirement Accounts (IRAs) and Flexible Spending Accounts (FSAs) for 2023. Many employers are in the middle of or approaching their open enrollment season. Below are some important changes employers should note.

Individual Retirement Accounts (pretax)

• The employee contribution limit for 2023 will increase to $22,500 (was $20,500 in 2022)
  • Limit applies to 401(k), 403(b), and most 457 plans
• The catch-up contribution limit for employees 50 years and older will increase to $7,500 (was $6,500 in 2022)
  • Eligible employees may contribute up to a combined total of $30,000 in 2023

Flexible Spending Accounts

• The employee contribution limit for healthcare FSAs in 2023 will increase to $3,050 (was $2,850 in 2022)
  • The FSA carryover limit will increase to $610 (was $570 in 2022)
• There are no changes to the employee contribution limit for dependent care FSAs for 2023
  • Single or married filing jointly remains $5,000
  • Married filing separate remains $2,500

Tips for Employers

Studies have shown a correlation between employees’ use of employer-provided benefits and their engagement, which in turn often correlates with retention. Educating employees on the value of their benefits, and encouraging them make to use of the available benefits can help employers retain their talent.

However, increasing the use of benefits also correlates to increased costs. Higher 401(k) limits may lead to increased employee contributions and participation, which may lead to increased matching costs, depending on how the employer calculates its match.

Increased FSA rollover may eliminate the urgency on the employees to spend down their accounts. Employers may find themselves paying for maintenance costs associated with FSAs that have only a small balance. Employers may consider encouraging employees to spend down their accounts by the end of the year by providing a list of eligible expenses.

Employers should also work with their benefit providers to determine if and how these increased limits will impact the benefits offered to employees.