FSA pig deetail

Health FSA and Commuter Benefits Limits Go Unchanged for 2021

12/04/2020 Written by: Nathanael M. Alexander, Esq.

Health FSAs
On October 27, 2020, the IRS announced in Rev. Proc. 2020-45 the annual inflation adjustments for the 2021 tax year. Included in this announcement, and of consequence to the employee benefits world, the IRS noted that the dollar limit maximum for employee contributions made on a pre-tax basis via salary reductions to health flexible spending accounts (FSAs) under a cafeteria plan will remain the same for the 2021 calendar year. As it was for 2020, the dollar limit cap will continue to hold steady at $2,750. For cafeteria plans that allow for the carryover of unused amounts, the maximum carryover amount is once again set at $550.
As a result of this news, employers should ensure that their health FSAs are administered in such a way as to prohibit employees from exceeding $2,750 in pre-tax contributions and, if applicable, no more than $550 in carryovers. Although, it should of course be noted that employers have the right to impose a maximum limit on employee contributions to health FSAs that is lower than what the ACA permits. For example, an employer could opt to cap employee contributions for 2021 at $2,500 instead but cannot set the limit at $2,800 in defiance of the ACA’s provisions. Whatever amount the employer decides on should be communicated to employees during open enrollment and strictly adhered to.
It should also be mentioned that the health FSA limit applies on an individual employee basis only. Therefore, even employees with spouses and dependents are still capped at $2,750 in maximum salary reductions for the year. Family members are eligible to enroll in their own separate health FSAs if they so choose, however.

 



Also, as a general reminder - IRS Notice 2020-33, issued as a result of the COVID-19 pandemic, allows for employer sponsored health FSAs to increase their limits for unused carryover amounts from $500 to any amount not to exceed a maximum of $550. Notice 2020-33 provides that “…a plan may be amended to adopt the increased carryover amount for a plan year that begins in 2021, for example, at any time on or before the last day of the plan year that begins in 2021.”
Commuter Benefits
Further noted in Rev. Proc. 2020-45, for taxable plan years beginning in 2021, the monthly limitation for commuter benefits will remain static at $270. This applies to qualified parking and transit benefits alike.  

 



Of increased importance to employees during the pandemic, please be aware that in accordance with Reg. § 1.132-9, Q&A-15 any unused commuter benefits may be rolled over on a month-to-month or year-to-year basis and do not expire unless an employee leaves their current company or the program is discontinued or abandoned, at which point any unused funds remaining in the account will be returned to the employer. Claims for eligible expenses incurred during employment may be submitted for a period of up to 90 days post-termination of employment.
UPDATE – 12.4.20:
Although previous guidance prohibited the transfer of commuter benefits contributions between transit and parking accounts, the IRS has recently advised in IRS Information Letter 2020-0024 that a qualified transportation plan participant now has the capability to apply any unused transit benefit amounts to another transportation fringe benefit. For example, if an employee has money left in their transit account but is no longer commuting to work via public transportation due to the pandemic, the employee can transfer those leftover funds to a parking account instead (if offered by their employer and not in excess of the monthly maximum limit). This can also be done in reverse from a parking account to a transit account, if available.
Please note that refunds of commuter benefits are still not permitted. 
We will continue to monitor the situation for any further updates.

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