In 2013, the Affordable Care Act (ACA) put a cap on Health Care Flexible Spending Account (FSA) salary reductions, subject to Consumer Price Index (CPI) adjustments in future years. The Tax Cuts and Jobs Act (aka “Tax Reform”) enacted December 22, 2017, changed the measure of inflation to the average chained CPI-U (C-CPI-U) for the 12 month period ending August 31.
On May 12, 2020, IRS released Notice 2020-33, which indexed the maximum Health Care FSA rollover ($550) for plan years that begin or renew on or after January 1, 2020. The maximum that can be carried over from one plan year to the next is based on 20% of the maximum allowable plan limit (after inflationary changes). The August 2020 CPI was released by the Department of Labor. Thomson Reuters used the C-CPI-U for the 12 month period ending August 31 to reported projected inflation adjustments for 2021 for health, charitable, compliance and other specialty items.
Most notably this included a projection of no changes to the 2021 Health Care FSA Limit for a continued annual maximum of $2,750 per plan year. As a result, the maximum Health Care FSA rollover limit of $550 will remain unchanged for plans that begin or renew on or after January 1, 2021.
Keep in mind the following:
These benefit adjustments are not official until the IRS releases a Revenue Procedure on this and other benefit limits later this fall, however, we have reason to believe that this $2,750 Health Care FSA limit and $550 Health Care FSA rollover limit will be effective for 2021.
This is a projection and the IRS typically announces the official increase to benefit limits around the third Thursday in October (10/15/2020), however, this can be later.
The new limit would apply for the first plan year beginning or renewing on or after January 1, 2021.
The Health Care FSA pre-tax salary reduction maximum limit is per employee, per employer, per plan year.
If an employer contributes to the Health Care FSA, the employer’s contribution is in addition to the amount that the employee can elect. The employee can elect up to the salary reduction maximum and still receive the employer’s contribution in addition. The employee could have more than the projected $2,750 available to reimburse expenses if employer contributions are part of the plan design. If an employer contribution can be taken as taxable income (cash), the employer contribution amount is part of the $2,750 limit.
If an employer has adopted the $550 rollover (carryover) for the Health Care FSA, any amount that rolls over into the new plan year does not affect the maximum salary reduction election the employee can make for the new plan year.
An Employer that has the maximum Health Care FSA set as “statutory maximum” in their plan document will not need to formally amend the cafeteria plan to incorporate the new limit, the increase is automatic following the official announcement by the IRS later this fall.
An Employer that has the maximum Health Care FSA rollover set as “statutory maximum” in their plan document will not need to formally amend the cafeteria plan to incorporate the new limit, the increase is automatic following the official announcement by the IRS later this fall.
An Employer is not required to adopt to the new Health Care FSA plan limit or rollover limit increase, and may keep an established Health Care FSA maximum or rollover as a specific dollar amount ($2,700 and $500 for example) and keep the same limit for 2021. However, if an employer wants to take advantage of the new projected increase to the annual maximum, an employer is required to amend the plan to increase the Health Care FSA maximum to the new amount if the employer did not previously select the statutory maximum.
These benefit plan adjustments are subject to change and will not be official until the IRS releases a Revenue Procedure on this and other benefit limits later this fall and we will report any additional updates to these limits as they may become available.