Rules & Limits on Section 125 Plans & Self Employed Individuals

A Section 125 plan, sometimes called a cafeteria plan, is one of the most valuable tools available to employers for helping employees pay for benefits with pre-tax dollars. However, the tax rules that make Section 125 plans valuable for employees can create limitations for certain business owners. Individuals who are treated as self-employed are generally not permitted to participate in a Section 125 plan as employees, and attempting to include them can jeopardize the tax advantages of the arrangement for the plan as a whole.

What is a Section 125 plan?

Under Section 125 of the Internal Revenue Code (IRC), an employer can establish a plan that allows employees to choose between taxable compensation (cash) and certain non-taxable benefits. When an employee elects a benefit under the plan, such as health insurance premiums, a Health Flexible Spending Account (FSA) or a Dependent Care FSA (DCFSA), the amount is deducted from their paycheck before federal income and payroll taxes are calculated. This reduces the employee’s taxable income, as well as the employer’s payroll tax obligation.

The tax exclusion under Section 125 is available only to employees as defined by the IRC. Put simply, if the Internal Revenue Service (IRS) treats an individual as an owner rather than an employee, they are not eligible for pre-tax deductions under Section 125. Therefore, individuals who are considered self-employed for tax purposes do not qualify as employees under this definition and cannot participate in a Section 125 plan on the same basis as W-2 employees.

It is also important to remember that eligibility for pre-tax deductions is separate and distinct from eligibility for an underlying health plan or benefit. It is possible that someone may be eligible for an employer’s health benefit, like the medical or dental plan, but may also NOT be eligible to pay premiums for that benefit on a pre-tax basis.

Who is considered self-employed?

The restriction noted above applies to four categories of individuals, each treated as self-employed under the Internal Revenue Code:

• Sole proprietors are individuals who own and operate a business as a single person without forming a separate legal entity. The business and the owner are treated as the same taxpayer for federal tax purposes, which means the owner cannot also be an employee of their own sole proprietorship.
• Partners in a partnership are also treated as self-employed, regardless of how active they are in the business. A partner who works full-time in the partnership is still not considered an employee for purposes of Section 125.
• S corporation shareholders who own more than two percent of the corporation’s stock are treated similarly to partners under the tax code. This two-percent threshold is important: a shareholder who owns two percent or less is treated as an employee and may participate in the Section 125 plan. A shareholder above that threshold is not.
• LLC members are treated based on how the LLC is taxed. If the LLC is taxed as a sole proprietorship or partnership, the members are treated as self-employed and cannot participate. If the LLC has elected to be taxed as a C corporation, its members may be treated as employees. If taxed as an S corporation, the two-percent ownership rule described above applies.

Entity names that include terms such as “Corporation” or “LLC” do not provide enough detail on how the entity is taxed. Thus, an entity’s name alone does not indicate whether the owners can participate in a cafeteria plan.

Health FSA restrictions

A Health FSA allows employees to set aside pre-tax dollars to pay for eligible out-of-pocket medical expenses such as deductibles, copays and certain over-the-counter items. Because a Health FSA is offered through a Section 125 plan, the individuals described in the prior section cannot participate.

HSA restrictions and contribution rules

A Health Savings Account (HSA) is a tax-advantaged account available to individuals enrolled in a qualifying High Deductible Health Plan (HDHP). Unlike a Health FSA, an HSA is not tied to an employer plan, which means self-employed individuals can open and contribute to one directly. However, the Section 125 restriction still affects how contributions work.

W-2 employees who contribute to an HSA through their employer’s Section 125 plan avoid both income taxes and payroll taxes (Social Security and Medicare) on those contributions. Self-employed individuals who contribute directly to an HSA can deduct the contributions on their personal tax return, which reduces their income tax. But those contributions are still subject to self-employment tax. The practical effect is that self-employed individuals pay slightly more in tax on the same HSA contribution than a W-2 employee would.

Dependent Care FSA restrictions

A DCFSA allows employees to set aside pre-tax dollars to pay for eligible dependent care expenses, such as daycare, after-school programs or care for a dependent adult. Like the Health FSA, a DCFSA is offered through a Section 125 plan, and the same restrictions apply.

Premium-Only Plan restrictions

A Premium-Only Plan (POP) is the simplest form of a Section 125 plan. It only allows employees to pay their share of employer-sponsored health insurance premiums with pre-tax dollars. Many employers establish a POP simply to reduce the payroll tax cost of offering health coverage.

Self-employed individuals in the covered categories cannot participate in a POP for the same reason they cannot participate in any other Section 125 arrangement. A more-than-two-percent S corporation shareholder, for example, cannot have their health insurance premium deducted on a pre-tax basis through the company’s POP. Instead, the premium must be included in the shareholder’s W-2 wages in Box 1. The shareholder may then claim the self-employed health insurance deduction on their personal return. The deduction is still available, but it works differently and does not reduce self-employment tax the way a POP deduction would for a regular employee.

Takeaways

Section 125 plans provide real tax benefits, but those benefits are limited to employees as defined by the tax code. Sole proprietors, partners, more-than-two-percent S corporation shareholders and most LLC members cannot participate in a Health FSA, DCFSA, HSA salary reduction arrangement or POP through their own business. Including these individuals in a Section 125 plan without recognizing these restrictions can create tax compliance problems for the business and for the individual.

IRS Announces 2026 Health and Welfare Limits

Earlier this month, the IRS issued Rev. Proc. 2025-32, which announces the 2026 indexed limits for certain health and welfare benefits.  This is in addition to the limits the IRS announced in Rev. Proc. 2025-19 on May 1, 2025. 

Health and Welfare Limit Changes

	2025	2026
HSA Contributions	$4,300 for self-only coverage $8,550 for family coverage	$4,400 for self-only coverage $8,750 for family coverage
HSA-Compatible HDHP Deductible	$1,650 for self-only coverage $3,300 for family coverage	$1,700 for self-only coverage $3,400 for family coverage
HSA-Compatible HDHP Out-of-Pocket Maximum	$8,300 for self-only coverage $16,000 for family coverage	$8,500 for self-only coverage $17,000 for family coverage
Health FSA Salary Reductions	$3,300	$3,400
Health FSA Carryover	$660	$680

One Big Beautiful Bill Brings Changes for Employee Benefit Plans

On July 4, 2025, President Donald Trump signed the One Big Beautiful Bill Act (“OBBB”) into law. The almost 900-page bill is a sweeping tax and spending package that President Trump regards as a fulfillment of campaign promises. In addition to tax and spending cuts, the OBBB includes several provisions that will impact employee benefit plans. Thankfully, the OBBB does not eliminate the tax exclusions for employer-provided health coverage.

Executive Summary

The OBBB’s changes for employee benefit plans include enhancements for Health Savings Accounts (HSAs), permanent extension of the telehealth relief for high-deductible health plans (HDHPs), and an increase in the annual contribution limit for dependent care FSAs. Most of the OBBB changes for employee benefit plans are effective in 2026 and do not require immediate employer action. The permanent telehealth relief extension for HDHPs is effective retroactively for the 2025 tax year so plan sponsors need to decide how to handle charges for telehealth benefits received prior to satisfaction of the deductible. The purpose of this alert is to provide an overview of these and other changes below and how they may impact your employee benefit plans but you will need to check with your insurance carrier on specifics on how they will handle some of these provisions.

Enhancements for Health Savings Accounts

There are two notable enhancements for HSAs:

• Permanent extension relief for first dollar telehealth benefits. The latest iteration of this previously temporary relief (which was a product of the COVID-19 pandemic) expired for plan years beginning in 2025. Under the OBBB, this relief is now permanent retroactively to plan years beginning after Dec. 31, 2024. This allows plans to provide low or no-cost telehealth benefits prior to satisfaction of the deductible for those enrolled in a qualified HDHP without jeopardizing employees’ HSA contributions.
• Direct primary care services. Under the OBBB, direct primary care service arrangements are not disqualifying coverage for HSA account holders and certain expenses are HSA-eligible expenses effective for months beginning after Dec. 31, 2025. Generally, direct primary care services include a monthly fee that covers office visits prior to the satisfaction of the HDHP deductible. These monthly fees are now HSA-qualified expenses, provided they do not exceed $150 per month for an individual or $300 per month for family (indexed for inflation annually).

The permanent extension of telehealth relief is a huge win for plan sponsors and employees. Since this relief is retroactive to plan years beginning after Dec. 31, 2024, plan sponsors who began charging HDHP participants fair market value (FMV) for telehealth services received prior to the satisfaction of the deductible can either keep their decision in place or pivot by reimbursing the FMV assessments already charged with either cash or HSA contributions. Plan sponsors who decided not to charge for telehealth in hopes of extended relief can rely on the retroactive effect of this relief and do not need to take action.

Increased Dependent Care FSA Limits

Effective for tax years beginning after Dec. 31, 2025 (i.e., January 2026 and beyond), the dependent care FSA limit is increased to $7,500 ($3,750 for married couples filing separately). This limit is not indexed for inflation.

While this increase is not as substantial as working parents would like, it is welcome news given that the prior limits have been in place since 1986 (save for a temporary increase during the COVID-19 pandemic). Plan sponsors will want to communicate these changes for 2026 open enrollment and ensure that their FSA vendor has updated plan documents/SPDs as well as the vendor’s systems to accommodate this increased limit.

Fringe Benefits

There are two notable changes:

• Effective for payments made after Dec. 31, 2025, the OBBB makes permanent the tax-free nature for certain employer payments of employee student loans under educational assistance programs. The overall educational assistance program exclusion (currently $5,250) is indexed for inflation.
• Creation of “Trump Accounts.” The OBBB creates new tax-favored accounts for children effective for tax years beginning after Dec. 31, 2025. Trump Accounts can be established for children under the age of 18 and include a $5,000 per year (indexed) contribution limit. Distributions are generally prohibited until the child turns 18. Employers can make up to $2,500 in nontaxable contributions. Additionally, there will be a pilot program under which the Treasury Department will pay a one-time credit of $1,000 to the Trump Account of U.S. citizen children born between 2025 and 2028. These accounts will operate similarly to IRAs with investments growing on a tax-deferred basis.

Next Steps

Most of the OBBB changes for employee benefit plans are effective in 2026 and therefore do not require immediate employer action.

Some action items for employers to consider include:

• For HDHP/HSA with 2025 plans years, decide whether to continue to charge FMV for telehealth services received prior to satisfaction of the deductible or pivot and reimburse telehealth FMV charges incurred for the 2025 plan year.
• Work with the FSA vendor to implement the increase in dependent care FSA limits for the 2026 tax year and communicate the increased limit to employees during 2026 open enrollment.
• Consider whether to make any employee benefit plan changes in 2026 to take advantage of OBBB changes regarding tax-free employer student loan payments under educational assistance programs and employer contributions to the Trump Accounts.

Preventative Care Updates: IRS and ACA Issue New Guidance

Both the IRS and the three agencies tasked with issuing rules under the Affordable Care Act (“ACA”) have released guidance on new items considered preventive and medical care, as well as some further requirements around existing items plans are required to cover. Some of the guidance related to high deductible health plans (“HDHPs”) is effective retroactively presumably because some HDHPs may have already covered those items believing them to be preventive care.

Additional Medical and Preventive Care

In IRS Notice 2024-71, the IRS created a safe harbor stating that male condoms will be considered medical care for tax purposes. Among other results, this means that health plans, health flexible spending arrangements (“Health FSAs”), health reimbursement arrangements (“HRAs”), and health savings accounts (“HSAs”) can pay for or reimburse the cost of male condoms on a tax-free basis. The notice doesn’t specify an effective date, but presumably it is effective immediately.

However, for them to be preventive care for purposes of high deductible health plans and HSA purposes, separate guidance is required. As a reminder, for an individual to contribute to an HSA, they must be covered by a HDHP and not be covered by other non-permitted health insurance. Therefore, even though the IRS has now said that male condoms are medical care, they cannot be covered before the deductible under an HDHP without additional guidance.

Fortunately, the IRS also issued Notice 2024-75. It includes that needed guidance and some other items as well. Specifically, HDHPs can now cover the following items as preventive care before the individual satisfies the deductible:

• Oral contraceptives that are available over the counter, no prescription required, including emergency contraception. This change is effective for plan years beginning on or after December 30, 2022.
• Male condoms. No prescription is required. This is also effective for plan years beginning on or after December 30, 2022.
• Breast cancer screenings other than mammograms (such as MRIs or ultrasounds). This change is effective April 12, 2004 (the date prior guidance on this topic was issued).
• Continuous glucose monitors, if they pierce the skin. This change means that smartwatches or smartrings are not considered preventive care. Additionally, if the glucose monitor provides additional medical functions, like insulin delivery or non-medical functions, then these features would also need to be preventive care to be covered pre-deductible. That distinction means that some continuous glucose monitors can be treated as preventive care pre-deductible, but others that provide additional substantial non-medical functions likely will not. This change is effective July 17, 2019, the date prior guidance on continuous glucose monitors was issued.
• Insulin products without regard to whether they are prescribed to treat someone diagnosed with diabetes or prescribed to prevent the exacerbation of diabetes. This was a change in response to changes in the tax code under the Inflation Reduction Act. This is effective for plan years beginning on or after December 31, 2022.

The retroactive dates were presumably intended to address concerns that plans had already covered some of these items. However, to be clear, HDHPs are not required to cover these items pre-deductible, but this guidance allows them to do so without affecting a participant’s ability to contribute to an HSA.

FAQs part 68

In addition, the Departments of Health and Human Services, Labor, and Treasury issued guidance on some existing items plans are required to cover in their sixty-eighth edition of ACA FAQs.

For plans subject to the Women’s Health and Cancer Rights Act (“WHCRA”), the FAQs clarify that plans are required to cover chest wall reconstruction with an aesthetic flat closure, if elected by the patient in consultation with the attending physician. Under WHCRA, plans are generally required to cover reconstruction of the breast on which a mastectomy was performed, and surgery and reconstruction of the other breast to produce a symmetrical appearance. The guidance now confirms that this requirement includes providing an aesthetic flat closure, where extra tissues in the breast area are removed, and the remaining tissue is tightened and smoothed out to create a flat chest wall. Most plans are subject to WHCRA, including governmental plans, unless they are self-funded and have opted out. Church plans that have elected not to be subject to ERISA are not subject to WHCRA.

The FAQs address some common coding practices for items that are deemed to be medical care. The specifics and nuances of this guidance are more relevant to carriers or third party administrators (“TPAs”). However, in general, if an item is coded as preventive, it should be treated as such unless there’s additional information in the claim that would lead the plan or carrier to believe it should not be treated as preventive. If an item or service is not covered as preventive when it should be, participants and beneficiaries have the right to appeal under the relevant plan claims procedures.

Takeaways

Employers should work with their insurance carriers and TPAs to determine whether and how they plan to cover the additional permitted items for health FSAs, HRAs, and HDHPs. They should also address the coverage of the additional mandatory items from the FAQ guidance. Changes to plan documents, summary plan descriptions, or other communications may be required.

2025 FSA and Other Contribution Limits Announced

The IRS has announced the 2025 contribution limits for items like flexible spending accounts (FSA). Here’s a look at some of the items changing:

• Health FSA: $3,300 (Increased from $3,200). 
• FSA Rollover: $660 (Increased from $640). 
• Dependent Care: The annual limits will remain $5,000 for single taxpayers and married couples filing jointly or $2,500 for married people filing separately. 
• HSA Limits (Announced Previously): $4,300 for individuals and $8,550 for families.
• PCORI fee adjustment: 2025 Fee Not Yet Announced 

IRS Announces 2025 HSA & HDHP Limits

Employees will be able to sock away more money in their health savings accounts (HSAs) next year, thanks to rising inflation.

The annual limit on HSA contributions for self-only coverage in 2025 will be $4,300, a 3.6 percent increase from the $4,150 limit in 2024, the IRS announced May 9. For family coverage, the HSA contribution limit will jump to $8,550, up 3 percent from $8,300 in 2024.

Meanwhile, for 2025, a high-deductible health plan (HDHP) must have a deductible of at least $1,650 for self-only coverage, up from $1,600 in 2024, or $3,300 for family coverage, up from $3,200, the IRS noted. Annual out-of-pocket expense maximums (deductibles, co-payments and other amounts, but not premiums) cannot exceed $8,300 for self-only coverage in 2025, up from $8,050 in 2024, or $16,600 for family coverage, up from $16,100.

The IRS also announced that the excepted-benefit HRA limit will be $2,150 in 2025, up from $2,100.

Many industry experts tout HSAs as a smart way for employees to save for medical expenses, even in retirement, citing their triple tax benefits: Contributions are made pretax, the money in the accounts grows tax free and withdrawals for qualified medical expenses are tax free.

The increased annual limits from the IRS come as HSA enrollment continues to grow, and as more employers offer contributions to employees’ accounts. HSA assets hit a record in 2023, surging to $123.3 billion last year, up nearly 19 percent from the previous record of $104 billion in 2022, according to an annual report by Devenir Group, an HSA research firm and investment consultant firm.

Jon Robb, senior vice president of research and technology at Devenir, said that growth of HSA assets “project a strong, upward trajectory for the future, indicating a steady and significant expansion of the HSA market.”

SHRM’s 2023 Employee Benefits Survey found that 64 percent of employer respondents offer a high-deductible health plan that is linked with a savings or spending account, like an HSA. That is the second most common type of health plan offered, behind a preferred provider organization plan, offered by 82 percent of employers. Among employers that do offer HSAs, 63 percent offer contributions to their employees’ accounts. The average individual-only annual contribution is $1,012, according to SHRM, while the average family annual contribution is $1,585.

Another recent report from the Employee Benefit Research Institute found that employer involvement in HSAs has a positive effect on employee’s account success. HSA holders who received employer contributions had higher balances and were more likely to invest.

HSA annual limits are released every April or May by the IRS—ahead of other limits such as flexible spending accounts and 401(k) contributions— giving employers and HSA administrators plenty of time to adjust their systems. Employers often promote HSAs and encourage employees to boost their contributions during open enrollment, though it would be a good idea for HR and benefits leaders to start that conversation now.

2024 Health FSA Limit Increased

The IRS has released Revenue Procedure 2023-34 confirming that for plan years beginning on or after January 1, 2024, the health FSA salary reduction contribution limit will increase to $3,200.

The adjustment for 2024 represents a $150 increase to the current $3,050 health FSA salary reduction contribution limit in 2023.

What About the Carryover Limit into 2025?

The indexed carryover limit for plan years starting in calendar year 2024 to a new plan year starting in calendar year 2025 will increase to $640.

• Carryover Limit from a Plan Year Starting in 2023 to a Plan Year Beginning in 2024: $610
• Carryover Limit from a Plan Year Starting in 2024 to a Plan Year Beginning in 2025: $640

Other Notable 2024 Health and Welfare Employee Benefit Amounts

• Dependent Care FSA: The dependent care FSA limit remains fixed (with no inflation adjustment) at $5,000.
• HSA Limits: The IRS released the significantly increased 2024 HSA limits back in May. The individual contribution limit will be $4,150 (up from $3,850) and the family contribution limit will be $8,300 (up from $7,750).
• ACA Employer Mandate Affordability: The 2024 affordability safe harbor percentage decreases dramatically to 8.39% (down from 9.12%). This sets the federal poverty line affordability safe harbor at a $101.93 maximum monthly employee-share of the premium for the lowest-cost plan option at the employee-only tier.
• ACA Pay or Play Penalties: The 2023 annualized employer mandate pay or play penalties will increase to $2,970 (the Section 4980H(a) “A Penalty”) and $4,460 (the Section 4980H(b) “B Penalty”) annualized.
• ACA Reporting: The deadline to furnish 2023 Forms 1095-C to employees will be March 1, 2024. Last year, the IRS finalized regulations making permanent the 30-day extension from the otherwise standard January 31 deadline. Although the 30-day extension typically results in a March 2 deadline, that date is moved up to March 1 in 2024 because it is a leap year.
  Keep in mind that IRS did not extend the good faith enforcement safe harbor from penalties for incorrect or incomplete information on the Forms 1094-C and 1095-C (generally $310 per return in 2024).
  The Form 1094-C and copies of the Forms 1095-C must be filed electronically with the IRS by April 1, 2024 (March 31 is a Sunday). As a result of newly finalized IRS regulations, virtually all employers will need to file electronically. This will generally require engaging with a third-party vendor that can complete the electronic filing.
• PCORI Fee: The IRS recently released the July 2024 PCORI fee for plan years that end on or after October 1, 2023, and before October 1, 2024 (including 2023 calendar plan years) at $3.22 per covered life.

2023 Health FSA Contribution Cap Rises to $3,050

Employees can put an extra $200 into their health care flexible spending accounts (health FSAs) next year, the IRS announced on Oct. 18, as the annual contribution limit rises to $3,050, up from $2,850 in 2022. The increase is double the $100 rise from 2021 to 2022 and reflects recent inflation. 

If the employer’s plan permits the carryover of unused health FSA amounts, the maximum carryover amount rises to $610, up from $570. Employers may set lower limits for their workers.

The limit also applies to limited-purpose FSAs that are restricted to dental and vision care services, which can be used in tandem with health savings accounts (HSAs).

The IRS released 2023 HSA contribution limits in April, giving employers and HSA administrators plenty of time to adjust their systems for the new year. The individual HSA contribution limit will be $3,850 (up from $3,650) and the family contribution limit will be $7,750 (up from $7,300).

CARRYOVER AMOUNTS OR GRACE PERIOD

Health or dependent care FSA funds that are not spent by the employee within the plan year can include a two-and-a-half-month grace period to spend down remaining FSA funds, if employees are enrolled in FSAs that have adopted the grace period option.

Health FSAs have an additional option of allowing participants to carry over unused funds at the end of the plan year, up to an inflation-adjusted limit set by the IRS, and still contribute up to the maximum in the next plan year. Health FSA plans can elect either the carryover or grace period option but not both.

Dependent Care FSAs

A dependent care FSA (DC-FSA) is a pretax benefit account used to pay for dependent care services such as day care, preschool, summer camps and non-employer-sponsored before or after school programs. Funds may be used for expenses relating to children under the age of 13 or incapable of self-care who live with the account holder more than half the year. 

These plans may also be referred to as dependent care assistance plans (DCAPs) or dependent care reimbursement accounts (DCRAs).

In general, an FSA carryover only applies to health FSAs, although COVID-19 legislation permitted a carryover of unused balances for DC-FSAs into the next plan year for plan years 2020 and 2021 only.

The dependent care FSA maximum annual contribution limit is not indexed and did not change for 2022 or for 2023. It remains $5,000 per household for single taxpayers and married couples filing jointly, or $2,500 for married people filing separately. Married couples have a combined $5,000 limit, even if each has access to a separate DC-FSA through his or her employer.

Maximum contributions to a DC-FSA may not exceed these earned income limits:

• For single account holders, the earned income limit is their salary excluding contributions to their DC-FSA.

• For married account holders, the earned income limit is the lesser of their salary excluding contributions to their DC-FSA or their spouse’s salary.

Employers can also choose to contribute to employees’ DC-FSAs. However, unlike with a health FSA, the combined employer and employee contributions to a DC-FSA cannot exceed the IRS limits noted above.

A separate tax code child and dependent care tax credit cannot be claimed for expenses paid through a DC-FSA, as “double dipping” is not permitted.

 

IRS Released More Benefit Limits for 2022

The IRS has released the 2022 contribution limits for FSA and several other benefits in Revenue Procedure 2021-45. The limits are effective for plan years that begin on or after January 1, 2022.

• The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) increases to $2,850.

• If the cafeteria plan permits the carryover of unused amounts, the maximum carryover amount is $570.

• The monthly limitation for qualified transportation fringe benefit regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $280. The monthly limit for qualified parking is also $280.

• Health Savings Account limits were already published, but they also increased to $3,650 for employee-only coverage and $7,300 for family coverage.

2021 FSA Contribution Cap Stays at $2,750

For 2021, the dollar limit for employee contributions to health flexible spending accounts (health FSAs) through salary reductions remains unchanged at $2,750, the IRS announced on Oct. 27 when it issued Revenue Procedure 2020-45.

For health FSA plans that permit the carryover of unused amounts, the maximum carryover amount for 2021 is $550, an increase of $50 from the original 2020 carryover limit.

The guidance also includes annual cost of living adjustments (COLAs), if any were made, for other employee benefit plans. For instance, for tax year 2021, the monthly limit for qualified transportation benefits remains $270, as is the monthly limit for qualified parking.

The IRS a day earlier announced 2021 contribution limits for 401(k) and similar defined contribution plans and annual limit adjustments for defined benefit pension plans.

The IRS released 2021 HSA contribution limits in May, giving employers and HSA administrators plenty of time to adjust their systems for the new year. The individual HSA contribution limit will be $3,600 (up from $3,550) and the family contribution limit will be $7,200 (up from $7,100).

Increased Carryover Cap

IRS Notice 2020-33, issued on May 12 as part of COVID-19 relief, raised the amount of funds that health FSA plans can carry over for 2020 to $550, up from $500. For 2021, the maximum carryover amount remains $550.

There are two options for FSA extensions; employers can adopt either or neither, but can’t offer both:

• Carryover. If an FSA plan has the carryover feature, participants can roll over up to $550 of unused FSA dollars to the next year but will forfeit any excess over $550 at year-end.
• Grace period. An optional grace period gives employees an additional two-and-a-half months to incur new expenses using prior-year FSA funds. At the end of the grace period in mid-March, all unspent funds must be forfeited.