Takes Effect:
Each plan year beginning on or after January 1, 2013.
Quick Facts:
- Salary reduction contributions to a health flexible spending account (health FSA) are limited to a total dollar amount per plan year:
- For plan year beginning in 2013 or 2014: $2,500.
- For plan year beginning in 2015 or 2016: $2,550.
- For plan year beginning in 2017: $2,600.
- For plan year beginning in 2018: $2,650.
- For plan year beginning in 2019: $2,700.
- For plan year beginning in 2020 or 2021: $2,750.
- In case of a “short” plan year of fewer than 12 months, the limit is prorated.
Details:
The Affordable Care Act amends § 125 of the Internal Revenue Code with respect to health FSA offered as part of a cafeteria plan. Starting with the plan year beginning in 2013, health FSA contributions are limited to no more than $2,500 per 12-month plan year. The limit is indexed every year for inflation. For instance, the limit is $2,750 for plan years beginning in 2020 or 2021. The employer’s health FSA plan may set a lower limit, but cannot allow contributions above the statutory limit.
The plan year annual limit applies to the sum of:
- Employee contributions (salary reduction amounts) to the health FSA; and
- Employer contributions to the health FSA if the employee can choose between the contribution and taxable compensation.
The plan year annual limit does not apply to:
- Contributions for other cafeteria plan benefits (e.g., health coverage premiums, dependent care account).
- Employer non-elective contributions (often called “seed money” or “flex credits”) provided that the employee cannot elect taxable compensation in lieu of the employer contribution.
- After-tax contributions.
The employer is responsible for ensuring its health FSA plan applies the limit correctly.
Plan Year: The limit applies to each plan year. Although most health FSAs operate on a calendar plan year basis (January 1 through December 31), this is not required. The plan year may be any 12-month period as designated in the cafeteria plan document with respect to the health FSA. Example: The health FSA plan year as set forth in the cafeteria plan document is July 1. In this case, the annual limit applies to contributions for the 12-month plan year from July 1 through June 30.
In the event that the plan year is fewer than 12 months, such as a one-time “short” plan year, the annual limit is prorated for the number of months in the plan year.
Multiple Health FSAs: The limit applies per employee on a combined basis to all health FSAs sponsored by the same employer. For instance, if the employee participates in a general-purpose health FSA and also in a limited-purpose FSA sponsored by the same employer, the annual limit applies to the combined FSAs. If, however, the employee is eligible for health FSAs sponsored by different employers, or if the employee and spouse each participate in an FSA as an employee, the annual limit applies separately to each. Employers that are members of a controlled group or affiliated service group (such as parent and subsidiary companies) are considered a single employer for purposes of the annual limit.
Grace Period or Carryover Period: Some health FSA plans provide a “grace period” or “carryover period” after the end of the plan year. “Grace period” means a period of up to two and a half months following the end of the plan year during which the employee may incur and reimburse eligible expenses up to his or her unused year-end balance. “Carryover period” means a period of up to 12 months following the end of the plan year during which the employee may incur and reimburse eligible expenses up to his or her unused year-end balance. The maximum allowable carryover amount is $550 if carried over from the plan year beginning in 2020 or later.
The annual limit applies to the plan year in which the contributions were made. Benefits paid during a grace period or carryover period do not count toward the subsequent plan year’s limit.
Due to the COVID-19 pandemic, employers have the option of adding or expanding their plan’s grace period provision or carryover provision (but not both) for 2020 and/or 2021. See IRS Notice 2020-29 and IRS Notice 2021-15 for details.
Official Guidance:
The federal departments provide regulatory guidance on this topic in the following material:
IRS Notice 2012-40 “Health Flexible Spending Arrangements”: click here.
IRS “2015 Increase due to Inflation Adjustments”: click here.
IRS Rev. Proc. 2015-53 “2016 Adjusted Items”: click here.
IRS Rev. Proc. 2016-55 “2017 Adjusted Items”: click here.
IRS Rev. Proc. 2017-58 “2018 Adjusted Items”: click here.
IRS Rev. Proc. 2018-57 “2019 Adjusted Items”: click here.
IRS Rev. Proc. 2019-44 “2020 Adjusted Items”: click here.
IRS Rev. Proc. 2020-45 “2021 Adjusted Items” click here.
IRS Notice 2020-29 “COVID-19 Guidance Under § 125 Cafeteria Plans”: click here.
This material is offered for general information only. It does not provide, and is not intended to provide, tax or legal advice. As always contact your Total Benefit Solutions, Inc Health Insurance Specialist for any further questions at (215)355-2121
Last Reviewed: May 3, 2021