The IRS has confirmed in Revenue Procedure 2020-45 that for plan years beginning on or after January 1, 2021, the health FSA salary reduction contribution limit will remain at $2,750
The contribution limit is set by the ACA (originally $2,500) and adjusts in $50 increments based on a complex cost-of-living calculation tied to the chained and standard consumer price index increases for the preceding calendar year. That measure was not sufficient in 2020 to increase by at least a $50 given the provision’s requirement to round down to the next lowest multiple of $50.
What About the $550 Carryover?
Earlier this year, the IRS announced an increase of the carryover limit to $550 for a plan years starting in calendar year 2020 to a new plan year starting in calendar year 2021.
For later years, the IRS stated the carryover limit will be an amount equal to 20% of the maximum health FSA salary reduction contribution for the plan year. The indexed limit will be in multiples of $10.
There will therefore be no increase to the $550 carryover limit for 2021 amounts carried into 2022 because there was no corresponding increase to the contribution limit.
What About Employer Contributions?
As a reminder, employer contributions (including non-cashable flex credits) generally cannot exceed $500 per plan year for the health FSA to maintain excepted benefit status. Non-excepted health FSAs cannot comply with the ACA market reform mandates.
Therefore, in most cases the maximum health FSA amount available for plan years beginning on or after January 1, 2021 will be limited to $2,750 (max employee salary contribution) + $500 (max employer contribution, if offered) = $3,250 (combined).
Also remember that the health FSA eligibility cannot be broader than the major medical plan eligibility to maintain excepted benefit status (as required by the ACA). In other words, the health FSA should never be available to an employee who is not also eligible for the major medical plan (regardless of enrollment status).
Other Notable 2021 Employee Benefit Amounts
- Commuter Benefits: The transit pass/vanpooling and parking limits will remain at $270 per month.
- Adoption Assistance: The adoption assistance plan limit will be $14,440 (up from $14,300).
- 401(k) Plan: The annual employee elective deferral limit remains at $19,500. See IRS Notice 2020-79 for more details.
- HSA Limits: The IRS released the 2021 HSA limits in May. The individual contribution limit will be $3,600 (up from $3,550) and the family contribution limit will be $7,200 (up from $7,100). See our full alert for more details.
- ACA Pay or Play Affordability: The 2021 affordability safe harbor percentage increases from 9.78% to 83%. This sets the federal poverty line affordability safe harbor at a $104.52 maximum monthly employee-share of the premium for the lowest-cost plan option at the employee-only tier. See our full alert for more details.
- ACA Pay or Play Penalties: The 2021 annualized employer mandate pay or play penalties will be ,700 (the Section 4980H(a) “A Penalty”) and ,060 (the Section 4980H(b) “B Penalty”) annualized. See the recently updated IRS Employer Shared Responsibility Payment FAQ for more details.
- San Francisco HCSO: The 2021 required health expenditure rates will be $3.18 per hour payable for large employers (up from $3.08) and $2.12 per hour payable for mid-sized employers (up from $2.05). See our full alert for more details.
- California SDI/PFL: It is anticipated that the 2021 taxable wage base will be $129,338, with a large employee contribution rate increase from 1.0% to 5% as a result of the pandemic. If these projections are correct, the employee contribution cap will jump from $1,229.09 to a whopping $1,940.07. That will be an additional $710.98 tax on workers earning up to the taxable wage base. As a reminder, California’s PFL program expanded to eight weeks in July. See our full alert for more details.
About the author
Lead Benefits Counsel
Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law. Connect with Brian on LinkedIn.
The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.
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