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IRS Announces 2023 COLAs for Health and Welfare Plans
Practical Law Legal Update w-037-2972 (Approx. 8 pages)
IRS Announces 2023 COLAs for Health and Welfare Plans
by Practical Law Employee Benefits & Executive Compensation
| Published on 19 Oct 2022 • USA (National/Federal) |
The Internal Revenue Service (IRS) has announced cost-of-living adjustments for limits involving health and welfare plans and certain fringe benefit arrangements governed by the tax code (Rev. Proc. 2022-38).
The Internal Revenue Service (IRS) has announced the 2023 cost-of-living adjustments (COLAs) for certain limits affecting health and welfare plans (Rev. Proc. 2022-38 (Oct. 18, 2022)). (Regarding the benefits-related COLAs for 2022, see Legal Update, IRS Announces 2022 COLAs for Health and Welfare Plans.)
Limits for Fringe Benefits and Other Code-Governed Health and Welfare Arrangements
For 2023, the following updated limits will apply:
- The dollar limit for employee salary reduction contributions to health flexible spending arrangements (health FSAs) is $3,050 (for 2022, this amount is $2,850) (see Practice Note, Cafeteria Plans: Dollar Limit on Employee Salary Reduction Contributions to Health FSAs). For cafeteria plans that permit carryovers of unused amounts, the carryover limit is $610 (for 2022, this amount is $570).
- The maximum credit allowed for adoption of a child is $15,950 (a $1,060 increase from 2022). The adoption credit begins to be phased out for individuals with modified adjusted gross incomes (MAGI) of more than $239,230 (for 2022, this amount is $223,410), and is completely phased out for individuals with MAGI of $279,230 or more (for 2022, $263,410 or more). Both phase-out adjustments are an increase of $15,820 over their 2022 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs and Fringe Benefits Toolkit).
- The maximum amount that can be excluded from an employee's gross income to adopt a child under an employer's adoption assistance program is $15,950 (a $1,060 increase from 2022). The exclusion begins to be phased out for individuals with MAGI of more than $239,230 (for 2022, this amount is $223,410), and is completely phased out for individuals with MAGI of $279,230 or more (for 2022, $263,410). Both phase-out adjustments are an increase of $15,820 over their 2022 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs).
- The monthly limits for qualified transportation fringe benefits are as follows:
- the aggregate monthly limit for transit passes and transportation in a commuter highway vehicle is $300 (increased from $280 for 2022) (see Practice Note, Fringe Benefits Under Code Section 132: Transportation Benefits); and
- the monthly limit an individual can exclude for qualified parking is $300 (increased from $280 for 2022) (see Practice Note, Fringe Benefits Under Code Section 132: Transportation Benefits: Overview of Qualified Transportation Fringe Benefits).
- The total payment and reimbursement amounts for the year under a qualified small employer health reimbursement arrangement (QSEHRA) cannot exceed:
- $5,850 (increased from $5,450) (26 U.S.C. 9831(d)); or
- $11,800 for family coverage (increased from $11,050).
- Regarding Archer medical savings accounts (Archer MSAs), a high-deductible health plan (HDHP) (self-only coverage) is a health plan with an annual deductible that is:
- not less than $2,650 (increased from $2,450 for 2022); and
- not more than $3,950 (increased from $3,700 for 2022).
Annual out-of-pocket expenses for covered benefits must not exceed $5,300 (increased from $4,950 for 2022) (see Practice Note, Defined Contribution Health Plans: Overview: Archer Medical Savings Accounts (Archer MSAs)). - Also regarding Archer MSAs, an HDHP (family coverage) is a health plan with an annual deductible that is:
- not less than $5,300 (increased from $4,950 for 2022); and
- not more than $7,900 (increased from $7,400 for 2022).
Annual out-of-pocket expenses for covered benefits must not exceed $9,650 (increased from $9,050 for 2022). - Under the ACA's small business health care tax credit, the maximum credit is phased out based in part on an employer's average annual wages in excess of $30,700 for 2022 (an increase of $2,000 from 2022) (26 U.S.C. § 45R). The $30,700 amount also is used in calculating who is an eligible small employer for the credit (see Practice Note, Small Business Health Care Tax Credit Under the ACA).
In addition, the limit used in the key employee definition for purposes of cafeteria plan nondiscrimination testing will increase from $200,000 to $215,000 (Notice 2022-55; see Practice Note, Cafeteria Plans: Key Employee Nondiscrimination Test).
ACA Affordability Percentage (Employer Mandate Penalties)
Earlier in 2022, the IRS also issued the 2023 percentage for determining whether an individual is eligible for affordable employer-sponsored minimum essential coverage (MEC) for ACA purposes (see Practice Note, Employer Mandate Under the ACA: Overview: Affordability Requirement and Safe Harbors). An employer is subject to employer mandate penalties (under Code Section 4980H(b)) unless it offers coverage that is affordable and provides minimum value (26 U.S.C. § 4980H(b)).
For plan years beginning in 2023, an employer's coverage is affordable for an employee if the employee's required contribution is no more than 9.12% of the employee's household income (down from 9.61% for 2022) (Rev. Proc. 2022-34).
ACA Premium Tax Credit
The ACA established a refundable tax credit (known as the premium tax credit (PTC)) for eligible individuals and families who purchase health insurance through an ACA health insurance exchange (26 U.S.C. § 36B; see Practice Note, Affordable Care Act (ACA) Overview). Individuals who meet certain criteria may have some or all of their estimated PTC paid to the insurer in advance. However, if an individual's advance credit payments are more than the actual PTC, the individual owes the excess credit as a tax.
The following limits apply for tax years beginning in 2023:
- If household income is less than 200% of the federal poverty line (FPL), the limits are:
- $350 for unmarried individuals (other than surviving spouses and heads of households) (increased from $325 for 2022); and
- $700 for all other taxpayers (increased from $650 for 2022).
- If household income is at least 200%, but less than 300%, of the FPL, the limits are:
- $900 for unmarried individuals (other than surviving spouses and heads of household) (increased from $825 for 2022); and
- $1,800 for all other taxpayers (increased from $1,650 for 2022).
- If household income is at least 300%, but less than 400%, of the FPL, the limits are:
- $1,500 for unmarried individuals (other than surviving spouses and heads of household) (increased from $1,400 for 2022); and
- $3,000 for all other taxpayers (increased from $2,800 for 2022).
(Rev. Proc. 2022-38.)
ACA Information Reporting
Regarding ACA information reporting, the IRS also announced increases to the calendar-year limits for penalties regarding:
- Filing a correct information return, for returns required to be filed in 2024 (26 U.S.C. § 6721).
- Furnishing a correct statement to individuals, for statements required to be furnished in 2024 (26 U.S.C. § 6722).
(Rev. Proc. 2022-38.)
For more information, see Practice Notes:
PCOR Dollar Amount
The IRS previously announced the applicable dollar amount for calculating patient-centered outcomes research (PCOR) fees for policy and plan years ending on or after October 1, 2021, and before October 1, 2022 (that is, $2.79) (Notice 2020-4; see Practice Note, Patient-Centered Outcomes Research (PCOR) Fees Under the ACA).
HSA Limits for 2023
Earlier in the year, the IRS issued 2023 inflation adjustments for health savings accounts (HSAs) and HDHPs (Rev. Proc. 2022-24 (Apr. 29, 2022); see Practice Note, Defined Contribution Health Plans: Overview). Under this guidance, the annual HSA contribution limit for 2023 for an individual with:
- Self-only HDHP coverage is $3,850 (an increase of $200 from 2022).
- Family HDHP coverage is $7,750 (an increase of $450 from 2022).
For 2023, an HDHP is a health plan with:
- An annual minimum deductible of:
- $1,500 for self-only HDHP coverage (an increase of $100 from 2022); and
- $3,000 for family HDHP coverage (an increase of $200 from 2022).
- Annual out-of-pocket expenses (that is, deductibles, copayments, and other amounts, but excluding premiums) that are not more than:
- $7,500 for self-only HDHP coverage (an increase of $450 from 2022); and
- $15,000 for family HDHP coverage (an increase of $900 from 2022).
Excepted Benefit HRAs (EBHRAs)
Earlier in 2022, the IRS issued the 2023 limit for amounts made newly available for excepted benefit HRAs (EBHRAs) (Rev. Proc. 2022-24; see Practice Note, Excepted Benefit Health Reimbursement Arrangements (EBHRAs)). EBHRAs are an excepted benefit—and therefore need not satisfy certain otherwise-applicable group health plan requirements—if they comply with several conditions (see Practice Note, Excepted Benefits). Under one of these conditions, amounts that are newly made available each plan year under an EBHRA may not exceed $1,800 (as adjusted for inflation).
The 2023 inflation adjustment for EBHRAs is the initial $1,800 limit multiplied by a COLA that is the percentage (if any) by which the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) for the prior calendar year is more than the C-CPI-U for 2019 (26 C.F.R. § 54.9831-1(c)(3)(viii)(B)).
Inflation adjustments to the C-CPI-U that are not a multiple of $50 are rounded down to the next lowest multiple of $50. Under this calculation, the maximum amount that may be made newly available for an EBHRA for plan years beginning in 2023 is $1,950 (up from $1,800 in 2022).
Social Security Wage Base
On October 13, 2022, the Social Security Administration (SSA) announced that the Social Security taxable wage base for 2023 will increase to $160,200 (from $147,000 for 2022).
Practical Impact
Some of the relatively large increases in this year's COLAs—including those for health FSA contributions and the transportation limits—may reflect the inflationary pressures that have plagued the US economy generally in 2022. Also, for more information on another recent premium tax credit development, see Legal Update, IRS "Family Glitch" Fix, Now Final, Intended to Expand Non-Employee Access to ACA Exchange Coverage.