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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:
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.
The new 2023 limits are:
HSA – Single $3,850 / Family $7,750 per year
HDHP (self-only coverage) – $1,500 minimum deductible / $7,500 out-of-pocket limit
HDHP (family coverage) – $3,000 minimum deductible / $15,000 out-of-pocket limit
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 Internal Revenue Service (IRS) recently announced (See Revenue Procedure 2021-25) cost-of-living adjustments to the applicable dollar limits for health savings accounts (HSAs), high-deductible health plans (HDHPs) and excepted benefit health reimbursement arrangements (HRAs) for 2022. Many of the dollar limits currently in effect for 2021 will change for 2022. The HSA catch-up contribution for individuals ages 55 and older will not change as it is not subject to cost-of-living adjustments.
The table below compares the applicable dollar limits for HSAs, HDHPs and excepted benefit HRAs for 2021 and 2022.
This week the IRS released two new sets of rules impacting Section 125 Cafeteria Plans. Notice 2020-33 provides permanent rule changes that include an increase in the amount of unused benefits that Health FSA plans may allow plan participants to rollover from one plan year to the next. Notice 2020-29 provides temporary rules designed to improve employer sponsored group health benefits for eligible employees in response to the coronavirus pandemic. The relief provided under each notice is optional for employers. Employers who choose to take advantage of any of the offered plan options will be required to notify eligible employees and will eventually be required to execute written plan amendments.
Notice 2020-33 modifies the amount of annual rollover of unused benefits that Health FSA plans may offer to Plan participants. Up until now, rollovers have been limited to $500 per Plan Year. The new rule sets the annual rollover limit to 20% of the statutory maximum annual employee Health FSA contribution for the applicable Plan Year. Because the statutory maximum is indexed for inflation, most years it increases (in mandated increments of $50).
The notice provides that the increased rollover amount may apply to Plan Years beginning on or after January 1, 2020. Because the corresponding annual Health FSA employee contribution limit for those Plan Years is $2,750, the annual rollover limit may be increased up to $550.
The relief provided under Notice 2020-29 falls into two major categories, both of which apply only for calendar year 2020. First, the IRS introduces several significant exceptions to the mid-year change of election rules generally applicable to Section 125 Cafeteria Plans. Second, the notice contains a special grace period which offers Health Flexible Spending Arrangement (FSA) and Dependent Care Assistance Program (DCAP) Participants additional time to incur eligible expenses during 2020.
The temporary exceptions to mid-year participant election change rules for 2020 authorize employers to allow employees who are eligible to participate in a Section 125 Cafeteria Plan to:
None of the above described election changes require compliance with the consistency rules which typically apply for mid-year Section 125 Cafeteria Plan election changes. They also do not require a specific impact from the coronavirus pandemic for the employee.
Employers have the ability to limit election changes that would otherwise be permissible under the exceptions permitted by Notice 2020-29 so long as the limitations comply with the Section 125 non-discrimination rules. For allowable Health FSA or DCAP election changes, employers may limit the amount of any election reduction to the amount previously reimbursed by the plan. Interestingly, even though new elections to make Health FSA and DCAP contributions may not be retroactive, Notice 2020-29 provides that amounts contributed to a Health FSA after a revised mid-year election may be used for any medical expense incurred during the first Plan Year that begins on or after January 1, 2020.
For the election change described in item 3 above, the enrolled employee must make a written attestation that any coverage being dropped is being immediately replaced for the applicable individual. Employers are allowed to rely on the employee’s written attestation without further documentation unless the employer has actual knowledge that the attestation is false.
The special grace period introduced in Notice 2020-29 allows all Health FSAs and DCAPs with a grace period or Plan Year ending during calendar year 2020 to allow otherwise eligible expenses to be incurred by Plan Participants until as late as December 31, 2020. This temporary change will provide relief to non-calendar year based plans. Calendar year Health FSA plans that offer rollovers of unused benefits will not benefit from this change.
The notice does clarify that this special grace period is permitted for non-calendar year Health FSA plans even if the plan provides rollover of unused benefits. Previous guidance had prohibited Health FSA plans from offering both grace periods and rollovers but Notice 2020-29 provides a limited exception to that rule.
The notice raises one issue for employers to consider before amending their plan to offer the special grace period. The special grace period will adversely affect the HSA contribution eligibility of individuals with unused Health FSA benefits at the end of the standard grace period or Plan Year for which a special grace period is offered. This will be of particular importance for employers with employees who may be transitioning into a HDHP group health plan for the first time at open enrollment.
As mentioned above, employers wishing to incorporate any of the allowable changes offered under Notices 2020-29 and 2020-33 will be required to execute written amendments to their Plan Documents and the changes should be reflected in the Plan’s Summary Plan Description and/or a Summary of Material Modification. Notice 2020-29 requires that any such Plan Amendment must be executed by the Plan Sponsor no later than December 31, 2021.
The Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) was signed into law by the President on Friday.
There are three direct inclusions that immediately expand the usage of health savings accounts (HSA), flexible spending accounts (FSA), and health reimbursement arrangements (HRA) for employees.
1. Telehealth services can now be covered pre-deductible under a High Deductible Health Plan. The end date of this provision is Dec 21, 2021.
2. Over the counter (OTC) drugs and medicines are now eligible for reimbursement from an HSA, FSA or HRA. This is a permanent change.
3. Menstrual products are now eligible for reimbursement from an HSA, FSA or HRA. This is a permanent change.
The IRS has recently issued Notice 2019-45, which increases the scope of preventive care that can be covered by a high deductible health plan (“HDHP”) without eliminating the covered person’s ability to maintain a health savings account (“HSA”).
Since 2003, eligible individuals whose sole health coverage is a HDHP have been able to contribute to HSAs. The contribution to the HSA is not taxed when it goes into the HSA or when it is used to pay health benefits. It can for example be used to pay deductibles or copays under the HDHP. But it can also be used as a kind of supplemental retirement plan to pay Medicare premiums or other health expenses in retirement, in which case it is more tax-favored than even a regular retirement plan.
As the name suggests, a HDHP must have a deductible that exceeds certain minimums ($1,350 for self-only HDHP coverage and $2,700 for family HDHP coverage for 2019, subject to cost of living changes in future years). However, certain preventive care (for example, annual physicals and many vaccinations) is covered without having to meet the deductible. In general, “preventive care” has been defined as care designed to identify or prevent illness, injury, or a medical condition, as opposed to care designed to treat an existing illness, injury, or condition.
Notice 2019-45 expands the existing definition of preventive care to cover medical expenses which, although they may treat a particular existing chronic condition, will prevent a future secondary condition. For example, untreated diabetes can cause heart disease, blindness, or a need for amputation, among other complications. Under the new guidance, a HDHP will cover insulin, treating it as a preventative for those other conditions as opposed to a treatment for diabetes.
The Notices states that in general, the intent was to permit the coverage of preventive services if:
The Notice is in general good news for those covered by HDHPs. However, it has two major limitations:
Given the expansion of the types of preventive coverage that a HDHP can cover, and the tax advantages of an HSA to employees, employers who have not previously implemented a HDHP or HSA may want to consider doing so now. However, as with any employee benefit, it is important to consider both the potential demand for the benefit and the administrative cost.
Late May 2019, the Internal Revenue Service (IRS) announced the 2020 limits for contributions to Health Savings Accounts (HSAs) and limits for High Deductible Health Plans (HDHPs). These inflation adjustments are provided for under Internal Revenue Code Section 223.
For the 2020 calendar year, an HDHP is a health plan with an annual deductible that is not less than $1,400 for self-only coverage and $2,800 for family coverage. 2020 annual out-of-pocket expenses (deductibles, copayments and other amounts, excluding premiums) cannot exceed $6,900 for self-only coverage and $13,800 for family coverage.
For individuals with self-only coverage under an HDHP, the 2020 annual contribution limit to an HSA is $3,550 and for an individual with family coverage, the HSA contribution limit is $7,100.
No change was announced to the HSA catch-up contribution limit. If an individual is age 55 or older by the end of the calendar year, he or she can contribute an additional $1,000 to his or her HSA. If married and both spouses are age 55, each individual can contribute an additional $1,000 into his or her individual account.
For married couples that have family coverage where both spouses are over age 55, each spouse can take advantage of the $1,000 catch-up, but in order to get the full $9,100 contribution, they will need to use two accounts. The contribution cannot be maximized with only one account. One individual would contribute the family coverage maximum plus his or her individual catch-up, and the other would contribute the catch-up maximum to his or her individual account.