2019 FSA Contribution Cap Rises to $2,700, IRS Belatedly Announces

2019 FSA Contribution Cap Rises to $2,700, IRS Belatedly Announces

Employees can put $50 more in health flexible spending accounts

Stephen Miller, CEBS By Stephen Miller, CEBS November 16, 2018
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Employers can let employees put an extra $50 into their health care flexible spending accounts (health FSAs) next year, but for some the announcement may have come too late.

For 2019, employees can contribute $2,700 to health FSAs, up from the 2018 limit of $2,650, the IRS said in Revenue Procedure 2018-57, issued Nov. 15. The increase also applies to limited-purpose FSAs that are restricted to dental and vision care services, which can be used in tandem with health savings accounts (HSAs).

Typically, changes in the limit are issued in October, before the start of the fall employee benefits open-enrollment season. This year, the announcement comes after many employees have selected their benefits on enrollment platforms programmed with the 2018 limit.

"Reports that the IRS is singularly focused on implementation of the Tax Cuts and Jobs Act would appear accurate, given the long delay in releasing the [FSA and other benefit] limits for 2019," said Danielle Capilla, director of employee benefits compliance at Alera Group, a network of insurance and financial services firms.

"Employers generally cannot wait until halfway through November to finalize their open enrollment information, and they generally do not want to rely on the expected changes," posted Jay Kirschbaum, vice president of compliance services at Lockton Benefit Group, a benefits brokerage and advisory firm in Kansas Cit, Mo. "From our experience, most employers used last year's figure of $2,650 as the maximum employees could elect for FSA purposes."


Health FSAs

A key feature of FSAs is that contributions are not subject to taxes, including Social Security and Medicare payroll (FICA) taxes.

The chart below shows the adjustment in contribution limits for 2019.

Health Flexible Spending Accounts
(includes limited-purpose FSAs)
2019 2018
Maximum salary reduction amount$2,700
$2,650

Source: IRS Revenue Procedure 2018-57, page 17.

Revenue Procedure 2018-57 also included higher annual adjustments for qualified transportation and parking benefits, and for employer-funded adoption assistance programs, among others employee benefits.


Employer Options

Given the late announcement, Kirschbaum listed two options for employers that sponsor health FSAs:

  • Do nothing, as there is no obligation to make the maximum salary reduction amount available to employees.
  • Reopen the enrollment process and let employees who want to increase their FSA election do so before Dec. 31 for calendar year plans.

Few employees would be likely to take advantage of the additional $50 deduction, Kirschbaum reasoned, so "while the benefits may be small, the work and effort to make it available will also be small."

"While employers cannot control the timing of the FSA limit announcement, smart benefits teams can be mindful and prepare ahead for employee questions," said Harrison Stone, general counsel and compliance officer at ConnectYourCare, a benefits administration firm.

 "Quickly executing a communication plan that provides a summary of the IRS announcement and what it means for the organization's benefits package can go a long way toward avoiding confusion among employees," he advised.

Employers that decide to make the higher limit available for 2019 must move quickly to inform employees about the change by providing addendums to benefits materials that have already been printed and distributed.

"Employers that gambled and released their open enrollment guides earlier this fall with the anticipated annual FSA contribution limit of $2,700 won't have to order reprints for employees," Capilla noted.

Modifying Plan Documents

While 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 third-party administrator if FSA administration is outsourced," said Janet Stebbins, a benefits analyst with Marsh Consulting Group.

Consider writing your plan documents to define the contribution limit as the annual amount allowed by the IRS for the plan year, so that annual amendments are not necessary to permit contributions up to the adjusted pretax limit, advised Brian Uhlig, senior vice president for benefits consulting at GCG Financial, part of Alera Group.

Otherwise, he noted, FSA plan sponsors can "simply make the adjustment next year."


Employee and Employer Funding

Health FSAs can be funded with pretax dollars by employees, employers or both. The new $2,700 limit applies only to employees' pretax salary-reduction contributions to either a full-purpose or a limited-purpose health FSA.

"Employer contributions generally do not count toward the limit," Stebbins said. However, if the employer contribution is a result of employees' use of cafeteria plan flex credits that employees could have elected to receive as taxable wages, then the contribution would count toward the $2,700 limit, she noted.

"Many employers may not be aware of regulations regarding employer contributions to their employees' FSAs," Stone said.

For health FSAs to remain an "excepted benefit" not subject to Affordable Care Act reporting requirements, he noted, employer contributions to the health FSA may not be more than an employee's salary-reduction contribution. If an employee's contribution is less than $500, however, the employer can still contribute up to $500.

"An employee who contributes $1,000 could receive only up to a $1,000 match from his or her employer, while an employee who contributes $350 could receive up to $500 from his or her employer," Stone explained.

Nevertheless, "employers will typically limit their contributions to no more than $500," said Jeremy Miller, CEO and founder of FSAstore.com, an e-commerce site. "This makes it easier for the FSA to meet certain Affordable Care Act requirements and easier for employers to administer."

Under this scenario, the maximum health FSA amount available to an employee in 2019 will be $2,700 (the maximum employee salary contribution) plus $500 (typically the maximum employer contribution, if offered). The total contribution from all sources would equal $3,200.

In addition, for a health FSA to be an excepted benefit, the employer must offer FSA participants the chance to enroll in major-medical group health coverage.

[SHRM members-only toolkit: Designing and Managing Flexible Benefits (Cafeteria) Plans]


FSA-Eligible Expenses

Funds in an FSA can pay for medical services under the health plan's deductible and can be used for health insurance co-payments. Some over-the-counter (OTC) medications can be purchased with FSA dollars accompanied by a doctor's prescription, while other OTC items do not require a prescription.


Unspent Funds

Since 2013, employers have been able to adopt two options for handling unused funds in a health FSA at year-end:

  • If a health FSA plan has a carryover feature, participants can roll over up to $500 of unused FSA dollars to the next year but will forfeit any excess over $500 at year-end. Any allowable amount that rolls over into the new plan year will not affect the maximum election that employees can make.
  • An optional grace period can give employees an additional two-and-a-half months—through March 15—to incur new expenses using prior-year FSA funds. At the end of the grace period, all unspent funds must be forfeited to the employer.

"Health FSAs cannot have both a carryover and a grace period option, and employers are not obligated to offer either extension," Miller said. A plan must be amended to implement either feature, he noted.

Explain Differences with HSAs

During open enrollment, employees are often confused about the differences between health FSAs and HSAs, which have higher annual contribution limits and allow unused funds to remain and grow within the account from year to year, among other distinctions. When both FSAs and HSAs are benefit options, open-enrollment communications should clearly state how the two differ, using a side-by-side list of account features, for instance.

An individual who is covered by a general-purpose health FSA is not eligible to contribute to an HSA. This holds true even if the individual is covered by a health FSA sponsored by a spouse's employer. However, an individual may contribute to both an HSA and a limited-purpose FSA that's restricted to dental and vision care expenses.

Dependent Care FSAs

The dependent care FSA maximum is set by statute and is not subject to inflation-related adjustments. These limits have not been raised in several years.

A dependent care FSA is a pretax benefit account used to pay for dependent care services such as day care, preschool, summer camps and nonemployer-sponsored before or after school programs. Funds may be used for expenses relating to children under the age of 13 or incapable of self-care who live with the account holder more than half the year. 

Dependent care FSAs also can be used for a spouse or other qualifying dependent who is physically or mentally incapable of self-care and lives with the account holder for more than half the year. They may be used for elder daycare when an elderly or disabled parent is considered a dependent and the account holder is covering more than 50 percent of the elderly or disabled parent's maintenance costs.

The annual contribution limit for a dependent care FSA is based on the account holder's tax filing status. Generally, joint filers have double the limit of single or separate filers. However, even if each spouse has access to a separate FSA through his or her employer, they are still subject to the mandated maximum limits.

Dependent Care FSA
Pretax Contribution Limits
2019 2018  
Account holder is married and files a separate tax return
$2,500
$2,500
 
Account holder is married and files a joint tax return or files as single/head of household
$5,000
$5,000
 

In addition, maximum contributions to a dependent FSA may not exceed these earned income limits:

  • For single account holders, the earned income limit is their salary excluding contributions to their dependent care FSA.

  • For married account holders, the earned income limit is the lesser of their salary excluding contributions to their dependent care FSA or their spouse's salary.

A separate tax code child and dependent care tax credit cannot be claimed for expenses paid through a dependent care FSA, as "double dipping" is not permitted.


Related SHRM Articles:

2019 Inflation-Adjusted Limits and Thresholds

Commuting and Adoption Benefit Amounts Rise in 2019, SHRM Online, November 2018

For 2019, 401(k) Contribution Limit for Employees Rises to $19,000, SHRM Online, November 2018

2019 HSA Limits Rise, IRS Says, SHRM Online, updated November 2018

Due in 2019, Employers' Final PCORI Payment Is Rising, SHRM Online, November 2018

2019 Payroll Taxes Will Hit Higher Incomes, SHRM Online, October 2018

ACA's Affordability Threshold Rises in 2019, SHRM Online, May 2018


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