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November 13, 2023
In Revenue Procedure 2023-24, the IRS sets forth a variety of 2024 adjusted tax limits. Among other things, the notice indicates that employee contribution limits toward health flexible spending arrangements (health FSAs) and qualified transportation fringe benefits will increase for 2024. The limit on annual employee contributions toward health FSAs for 2024 is $3,200 (increased from $3,050 in 2023), with the ability to carryover up to $640 (increased from $610 in 2023). The limit on monthly contributions toward qualified transportation and parking benefits for 2024 is $315 (increased from $300 in 2023).
The full text of Rev. Proc. 2023-24, including 2024 amounts and limitations for other taxes, may be found at: www.irs.gov/pub/irs-drop/rp-23-34.pdf.
The 2024 annual contribution limit of $3,200 for health FSAs applies to employee salary reductions. 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.
NOTE: Annual dependent care assistance program (DCAP) reimbursement limits are set by statute and not subject to inflationary adjustments, and therefore remain at $5,000 for single taxpayers and married couples filing jointly, or $2,500 for married people filing separately.
Employee contributions subject to the $3,200 annual limit include:
Employer contributions may be made in addition to the $3,200 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:
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 a carryover of up to $640 (for 2024), but never both.
Instead of annual contribution limits, qualified transportation fringe benefits are subject to monthly limits. The 2024 monthly limit of $315 applies separately to:
An employee could elect up to $315/month for each (or could elect up to $630/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 an 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 $315 in any given month).
The views and opinions expressed within are those of the author(s) and do not necessarily reflect the official policy or position of Parker, Smith & Feek. While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it.