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October 28, 2016
In Revenue Procedure 2016-55, released last week, the IRS set forth a variety of 2017 adjusted tax limits. Among other things, the notice addresses slightly increased limits for health flexible spending accounts (FSAs).
Health Flexible Spending Account (FSA) – 2017 Annual Limitation of $2,600
Health care reform imposed a $2,500 limit on annual salary reduction contributions to health FSAs offered under Section 125 (Cafeteria) plans, effective for plan years beginning after December 31, 2012. The $2,500 amount was indexed for cost-of-living adjustments for plan years beginning after December 31, 2013, but was not changed for 2014. For 2015 and 2016, the annual limitation on salary reductions was increased to $2,550. The annual limitation for 2017 has been increased to $2,600.
NOTE – The $2,600 annual limit for health FSAs applies only to the amount that can be deducted pre-tax from an employee’s compensation to make employee contributions through a Section 125 cafeteria plan. It may help to think of this as a limit on pre-tax payroll deductions for health FSA purposes, rather than as a limit on the health FSA itself. In some circumstances an employee can have a health FSA benefit of greater than $2600, for example:
• If the employer makes contributions to the employee’s FSA accounts (see below); or
• If the health FSA includes the optional $500 carry-over provision and the employee has a carry-over from the previous year.
Employer Health FSA Contributions
Employer contributions to an employee’s health FSA are not limited by this rule, and may be made in addition to the $2,600 allowed for employee contributions. However, if a health FSA is to avoid violating health care reform requirements, it must meet “excepted benefit” status. To meet excepted benefit status, the health FSA must satisfy the following two conditions:
Therefore, although there isn’t technically an annual limitation on employer contributions, health care reform limits employer contributions to $500/year or an arrangement in which the employer contribution will not exceed the employee’s contribution, such as an employer match of employee contributions (up to $2,600).
The full text of Rev. Proc. 2016-55, including 2017 amount limitations for other taxes, may be found at https://www.irs.gov/pub/irs-drop/rp-16-55.pdf
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