IRS Announces 2021 Health FSA & Qualified Transportation Limits
October 27, 2020
In Revenue Procedure 2020-45, the IRS sets forth a variety of 2021 adjusted tax limits. Among other things, the notice indicates that employee contribution limits toward health flexible spending arrangements (FSAs) and qualified transportation fringe benefits are unchanged for 2021. The limit on annual employee contributions toward health FSAs for 2021 is $2,750, with the ability to carryover up to $550. The limit on monthly contributions toward qualified transportation and parking benefits for 2021 remains at $270. The full text of Rev. Proc. 2020-45, including 2021 amounts and limitations for other taxes, may be found here.
Health Flexible Spending Arrangements (FSAs)
The annual contribution limit of $2,750 for health FSAs applies specifically to employee contributions. The same limit applies for general-purpose and limited-purpose health FSAs. Employer contributions are not subject to the limit, but are subject to different restrictions under healthcare reform rules.
Employee Health FSA Contributions
Employee contributions subject to the $2,750 annual limit include:
- Amounts deducted pre-tax from an employee’s compensation through a cafeteria plan; and
- Employer flex credits that the employee has the option to use toward cash or other taxable benefits.
Employees may elect up to $2,750 even if they’ve carried over up to $550 from the previous plan year. In addition, employees who join mid-plan year may still elect up to $2,750 for the remainder of the plan year.
Employer Health FSA Contributions
Employer contributions may be made in addition to the $2,750 allowed for employee contributions. However, a health FSA must meet “excepted benefit” status to avoid violating health care reform requirements. To meet excepted benefit status, the health FSA must satisfy the following two conditions:
- Maximum Benefit Condition. The maximum benefit payable under the health FSA to any participant cannot exceed the greater of: (i) 2x the participant’s salary reduction election; or (ii) the amount of the participant’s salary reduction election plus $500. In other words, the employer can contribute up to $500 or a match of the employee’s contribution (up to $2,750 for 2021), whichever is greater.
- Availability Condition. Other non-excepted group health plan coverage (e.g., major medical coverage) must be made available for the year to those eligible to participate in the health FSA. Therefore, individuals must be eligible for both a group medical plan and a health FSA, but they do not have to be enrolled in both.
The combination of employee and employer contributions elected for the plan year must be made available throughout the plan year to reimburse qualifying medical expenses, even if the amounts have not yet been contributed (the “uniform coverage” rule). If an employee exhausts the funds and then terminates participation mid-plan year, the employer cannot request repayment. However, if the employee does not incur enough expenses during the plan year to exhaust the amounts contributed, the employee will forfeit the remaining balance (the “use-or-lose” rule) subject to any grace period or carryover provision in place for the plan. Plans can have up to a 2 1/2-month grace period or carryover of up to $550, but never both.
Qualified Transportation Fringe Benefits (Transportation & Parking)
Instead of annual contribution limits, qualified transportation fringe benefits are subject to monthly limits. The $270 monthly limit applies separately to: (a) qualified parking; and (b) the combination of commuter highway vehicles and transit passes. An employee could elect up to $540/month to use toward a combination of transportation and parking benefits. For qualified transportation fringe benefits, both employee and employer contributions count toward the monthly limit.
Just like contribution limits apply monthly, employees generally have the opportunity to change elections monthly (or even more frequently). Unused contributions cannot be cashed out, but they can be used in subsequent months. So if an employee fails to use all amounts contributed for qualified transportation or parking benefits and then terminates coverage, the leftover amounts would be forfeited. But if the employee continues participation in the plan, and perhaps reduces contributions for future months, unused amounts from one month may be used for coverage in later months (up to $270 in any given month).
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