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November 11, 2019
In Revenue Procedure 2019-44, the IRS sets forth a variety of 2020 adjusted tax limits. Among other things, the notice addresses slightly increased limits for employee contributions toward health flexible spending accounts (FSAs). Therefore, employers who currently offer health FSAs may choose to increase the annual election limit for participants for the 2020 plan year.
Healthcare reform imposed a $2,500 limit on annual salary reduction contributions to health FSAs offered under §125 (Cafeteria) plans, effective for plan years beginning after December 31, 2012. The $2,500 amount is indexed for cost-of-living adjustments. The annual limitation for 2019 was $2,700. The annual limitation has now increased by $50 to $2,750 for 2020.
The $2,750 annual limit applies only to the amount that can be deducted pre-tax from an employee’s compensation to make employee contributions through a cafeteria plan. In some circumstances an employee can have an annual health FSA benefit of greater than $2,750; for example:
NOTE: Non-elective employer contributions to a health FSA (e.g., matching or seed contributions, or flex credits) generally do not count toward the limit. However, if employees may elect to receive the employer contributions in cash or as a taxable benefit, then the contributions will be treated as salary reductions and will count toward the $2,750 limit if contributed to the health FSA.
Employer contributions to an employee’s health FSA are not limited by this rule, and 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:
The full text of Rev. Proc. 2019-44, including 2020 amounts and limitations for other taxes (e.g. qualified transportation fringe benefits, adoption assistance programs, QSEHRAs, eligible long-term care premiums), may be found at opens in a new windowhttps://www.irs.gov/pub/irs-drop/rp-19-44.pdf.
As always, should you have any questions, please contact your opens in a new windowParker, Smith & Feek Benefits Team. For additional employee benefit compliance news and information visit our opens in a new windowHealthcare Reform Explained website.
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.