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Health FSA limit will increase for 2017

December 13, 2016 Article 4 min read
Authors:
Jonathon Trionfi
The Affordable Care Act (ACA) imposes a dollar limit on employees’ salary reduction contributions to health flexible spending accounts (FSAs) offered under cafeteria plans. This dollar limit is indexed for cost-of-living adjustments and may be increased each year.

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On Oct. 25, 2016, the Internal Revenue Service (IRS) releasedRevenue Procedure 2016-55 (Rev. Proc. 16-55). Rev. Proc. 16-55increased the FSA dollar limit on employee salary reductioncontributions to $2,600 for taxable years beginning in 2017. It alsoincludes annual inflation numbers for 2017 for a number of other taxprovisions.

Action steps

Employers should ensure that their health FSA will not allowemployees to make pre-tax contributions in excess of $2,600 for2017, and they should communicate the 2017 limit to theiremployees as part of the open enrollment process.

An employer may continue to impose its own health FSA dollar limit, as long as it does not exceed the ACA’s maximum limit in effect for the plan year. For example, an employer may continue to limit employee health FSA contributions for the 2017 plan year to $2,500.

An employer may continue to impose its own health FSA limit, aslong as it does not exceed the ACA’s maximum limit for the plan year.This means that an employer may continue to use the 2016maximum limit for its 2017 plan year.

The ACA initially set the health FSA contribution limit at $2,500. For the years after 2013, the dollar limit isindexed for cost-of-living adjustments.

  • 2014
    For taxable years beginning in 2014, the dollar limiton employee salary reduction contributions to health FSAsremained unchanged at $2,500.
  • 2015
    For taxable years beginning in 2015, the dollar limiton employee salary reduction contributions to health FSAsincreased by $50, for a total of $2,550.
  • 2016
    For taxable years beginning in 2015, the dollar limiton employee salary reduction contributions to health FSAsremained unchanged at $2,550.
  • 2017
    For taxable years beginning in 2017, Rev. Proc. 16-55increased the dollar limit on employee salary

The health FSA limit will potentially be increased further for cost-of-living adjustments in later years.

Employer limits

An employer may continue to impose its own dollar limit on employees’ salary reduction contributions to healthFSAs, as long as the employer’s limit does not exceed the ACA’s maximum limit in effect for the plan year. Forexample, an employer may decide to continue limiting employee health FSA contributions for the 2017 plan yearto $2,500.

Per employee limit

The health FSA limit applies on an employee-by-employee basis. Each employee may only elect up to $2,600 insalary reductions in 2017, regardless of the employee’s family members who also benefit from the funds in thatFSA. However, each family member who is eligible to participate in his or her own health FSA will have aseparate limit. For example, a husband and wife who have their own health FSAs can both make salaryreductions of up to $2,600 per year, subject to any lower employer limits.

If an employee participates in multiple cafeteria plans that are maintained by employers under common control,the employee’s total health FSA salary reduction contributions under all of the cafeteria plans are limited to$2,600. However, if an individual has health FSAs through two or more unrelated employers, he or she can makesalary reductions of up to $2,600 under each employer's health FSA.

Salary reduction contributions

The ACA imposes the $2,600 limit on health FSA salary reduction contributions. Non-elective employercontributions to health FSAs (for example, matching contributions or flex credits) generally do not count towardthe ACA’s dollar limit. However, if employees are allowed to 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 theACA’s dollar limit.

In addition, the limit does not impact contributions under other employer-provided coverage. For example,employee salary reduction contributions to an FSA for dependent care assistance or adoption care assistanceare not affected by the health FSA limit. The limit also does not apply to salary reduction contributions to acafeteria plan that are used to pay for an employee’s share of health coverage premiums, to contributions to ahealth savings account (HSA) or to amounts made available by an employer under a health reimbursementarrangement (HRA).

Grace period/Carry-over feature

A cafeteria plan may include a grace period of up to two months and 15 days immediately following the end of aplan year. If a plan includes a grace period, an employee may use amounts remaining from the previous planyear, including any amounts remaining in a health FSA, to pay for expenses incurred for certain qualifiedbenefits during the grace period. If a health FSA is subject to a grace period, unused salary reductioncontributions that are carried over into the grace period do not count against the $2,600 limit applicable to thefollowing plan year.

Also, if a health FSA does not include a grace period, it may allow participants to carry over up to $500 of unusedfunds into the next plan year. This is an exception to the “use-it-or-lose-it” rule that generally prohibits anycontributions or benefits under a health FSA from being used in a following plan year or period of coverage. Ahealth FSA carryover does not affect the limit on salary reduction contributions. This means the plan may allowthe individual to elect up to $2,600 in salary reductions in addition to the $500 that may be carried over.

Plan amendments

Plan documents that specify the health FSA dollar limit must be amended if the higher limit will be used in 2017.

The information provided isonly a general summary and isbeing distributed with theunderstanding that PM GroupBenefit Advisors II, LLC is notproviding legal, tax,accounting, or otherprofessional advice, position,or opinions on specific facts ormatters and, accordinglyassumes no liabilitywhatsoever in connection withits use. Content ©2016Zywave, Inc. All rightsreserved.

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