The Internal Revenue Service (IRS) has announced that the 2020 limit on employee pre-tax FSA contributions will rise to $2,750, up from $2,700 in 2019. Revenue Procedure Bulletin 2019-44 provides the details of this and approximately sixty other tax-related annual inflation adjustments. The dependent care FSA maximum, which is set by statute and not subject to inflation-related adjustments, will remain at $5,000.
When does the new limit take effect? The $2,750 contribution limit applies to plan years beginning on or after January 1, 2020.
What contributions apply to the limit? The limit applies to an employee’s pre-tax contributions to either a full-purpose or a limited-purpose health FSA. Employer contributions generally do not count toward the limit. There is an exception if the employer contribution is the result of the employee’s use of cafeteria plan flex credits which he/she may have otherwise elected to receive in cash or as a taxable benefit, in which case the contribution would count towards the $2,750 limit.
What Employer action is needed? Employers are not required to adopt the new limit. If they do, they may need to update their Section 125 cafeteria plan document and inform their TPA if FSA administration is outsourced. If your open enrollment period is already underway, you may allow employees who have already made their elections to increase them up to the new limit as long as they do so prior to the first day of the 2020 plan year. Once the plan year begins, no further changes can be made to an employee’s elections unless they experience a qualifying event (if the plan permits such).
Reminder: In order for an FSA to maintain excepted benefit status under ACA, the following conditions must be met:
- Employees who are eligible for the FSA must also be eligible for other Employer offered non-excepted benefits (the group health plan), and
- The employer does not make any contributions to the FSA, or
- The employer contribution is a dollar-for-dollar match of the employee’s contribution, or
- The employer contributes no more than $500 to the FSA.
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