What is the maximum amount that may be in a health care flexible spending arrangement account before it is subject to income taxes?

A health care flexible spending arrangement (FSA) allows employees to set aside pre-tax dollars for eligible medical expenses, thus providing potential tax savings. The maximum contribution limit for a health care FSA is set annually by the IRS, and for the year 2023, that limit is $2,850. However, as of the 2020 tax year, the contribution limit was adjusted, and the IRS allowed employers to set a limit based on their own plans, but many employers align their offerings with the IRS maximum.

Choosing $2,700 aligns with the limits set for 2021 and 2022 contributions, as they increased beyond the past limits and offered a more updated threshold. Contributions beyond the set limit are subject to income tax, meaning that any contributions made that exceed this amount would not receive preferred tax treatment.

In examining the other figures, they do not reflect the current federal guidelines or accommodate the necessary pre-tax benefit outlined for these accounts, which is why they fall outside of the acceptable amounts for FSA contributions. Knowing the contribution limits is essential for effectively planning tax-saving strategies related to health care costs. Understanding that contributions exceeding the applicable IRS threshold would result in taxable income helps taxpayers optimize their financial approaches regarding medical expenses.