2022 Health FSA Contribution Cap Rises to $2,850

Employees can put an extra $100 into their health care flexible spending accounts (health FSAs) next year, the IRS announced on Nov. 10, as the annual contribution limit rises to $2,850, up from $2,750. But with open enrollment for the 2022 benefits year already under way at many organizations, the increase may have come too late for some employees to take advantage of it.

If the employer's plan permits the carryover of unused health FSA amounts, the maximum carryover amount rises to $570, up from $550, but COVID-19 relief extends the allowable carryover amount further, as discussed below.

Tax-exclusion limits for employer-sponsored commuting benefits and adoption assistance programs are also rising for 2022 due to cost of living adjustments (COLAs), the IRS announced in Revenue Procedure 2021-45.

The IRS, on Nov. 4, separately announced 2022 contribution limit COLAs for 401(k) and similar defined contribution plans and annual limit adjustments for defined benefit pension plans.

Health FSAs

The chart below shows the adjustment in health FSA contribution limits for 2022. Employers may set lower limits for their workers.

The limit 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).

The IRS released 2022 HSA contribution limits in May, giving employers and HSA administrators plenty of time to adjust their systems for the new year. The individual HSA contribution limit will be $3,650 (up from $3,600) and the family contribution limit will be $7,300 (up from $7,200).

A Late Notice

When benefit plan limits for the upcoming year are released after open enrollment periods have begun, "many employers just keep the previous year's limits in place for ease of administration, and lag a year behind," said Kim Buckey, vice president of client services at DirectPath, a benefits advocacy and education firm.

Some employers, however, are willing and able to adjust the their systems to accept the higher limit for 2022 and provide updated information on the change to employees, so they can take full advantage of their FSAs. In that case, although "most enrollment materials have been finalized and distributed, employers should leverage more immediate communication channels—such as e-mail, social media and virtual benefits fairs—to get the word out," Buckey said,

She added, "This is yet another reason employers should disseminate enrollment information online as much as possible—it enables quick and easy updating when information changes at the last minute."

Danielle Capilla, vice president of compliance, employee benefits, at Alera Group, a network of insurance and financial services firms, also noted that "print deadlines and benefit enrollment systems require earlier decision making by employers who host early fall enrollment."

Like many employers and service providers, Capilla expressed the hope that "in future years, the IRS will release contribution limits earlier, as many employers are eager to wrap up open enrollment in late October to early November. More than ever employers are grappling with last minute enrollment changes due to various temporary adjustments to contribution limits and roll-overs on health FSAs and dependent care accounts that were permitted due to COVID-19."

Bill Sweetnam, legislative and technical director of the Employers Council on Flexible Compensation (ECFC) in Washington, D.C., advised employers not to let the late announcement stop them from offering employees the higher contribution rate for 2022.

At most organizations, open enrollment was still ongoing as of the second week of November, he noted, in which case "employees would not be precluded from electing the maximum FSA amount," provided that employers notify them of the available increase and adjust their enrollment platforms.

Carryover Amounts, Grace Periods and Pandemic Relief

Health or dependent care FSA funds that are not spent by the employee within the plan year can include a two-and-a-half-month grace period to spend down remaining FSA funds, if employees are enrolled in FSAs that have adopted the grace period option.

Health FSAs have an additional option of allowing participants to carry over unused funds at the end of the plan year, up to an inflation-adjusted limit set by the IRS, and still contribute up to the maximum in the next plan year. Health FSA plans can elect either the carryover or grace period option but not both.

"The FSA carryover limit continues to be 20 percent of the annual contribution limit, although special COVID-19 relief gives employers the option to allow employees to carry over their unspent 2021 FSA balance into 2022," noted Timothy P. Brechtel, a partner at law firm Jones Walker' in New Orleans, and Shawn J. Daray, an associate at the firm.

As part of COVID-19 relief, the Consolidated Appropriations Act, 2021, signed into law at the end of 2020, and IRS Notice 2021-15, issued February 2021, addressed how employers could:

• Allow participants in health care or dependent care FSAs to carry over unused balances from a plan year ending in 2020 to a plan year ending in 2021, and to carry over unused balances from a plan year ending in 2021 to a plan year ending in 2022. An employer could choose to provide either, or neither, of these carryover extensions.
  

• Extend to 12 months the grace period for spending unused FSA funds for plan years ending in 2020 or 2021.
  

• Allow employees who stopped participating in a health FSA plan during 2020 or 2021 to continue to be reimbursed from unused balances through the end of the plan year in which their participation ended, including any extended grace periods.
  

Dependent Care FSAs

A dependent care FSA (DC-FSA) is a pretax benefit account used to pay for dependent care services such as day care, preschool, summer camps and non-employer-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. 

These plans may also be referred to as dependent care assistance plans (DCAPs) or dependent care reimbursement accounts (DCRAs).

In general, an FSA carryover only applies to health FSAs, but COVID-19 relief permitted a carryover of unused balances for DC-FSAs into the next plan year for plan years 2020 and 2021. Also, for these plan years employers could (but were not required to) amend their plans to allow employees to prospectively enroll in, increase, decrease or revoke their DC-FSA elections midyear, regardless of whether they experienced a permitted change in status event.

In addition, the American Rescue Plan Act, signed into law on March 11, 2021, raised pretax contribution limits for DC-FSAs for calendar year 2021. The DC-FSA annual limits for pretax contributions increased to $10,500 (up from $5,000) for single taxpayers and married couples filing jointly, and to $5,250 (up from $2,500) for married individuals filing separately. The higher limits applied to the plan year beginning after Dec. 31, 2020 and before Jan. 1, 2022.

For 2022, the DC-FSA maximum, which is set by statute and is not subject to inflation-related adjustments, returns to $5,000 a year for single taxpayers and married couples filing jointly, or $2,500 for married people filing separately. Married couples have a combined $5,000 limit, even if each has access to a separate DC-FSA through his or her employer.

Maximum contributions to a DC-FSA may not exceed these earned income limits:

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

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

Employers can also choose to contribute to employees' DC-FSAs. However, unlike with a health FSA, the combined employer and employee contributions to a DC-FSA cannot exceed the IRS limits noted above.

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

Elder care may be eligible for reimbursement with a DC-FSA if the adult lives with the FSA holder at least 8 hours of the day and is claimed as a dependent on the FSA holder's federal tax return.

[SHRM member-only HR Q&A: What is a dependent care assistance plan (DCAP)?]

Commuting Benefit Amounts

Employer-funded parking and mass-transit subsidies are tax-exempt for employees. Using pretax income, employees can also pay their own mass-transit or workplace parking costs through an employer-sponsored salary deferral program.

These expenses include the value of mass-transit passes and van pooling services, and parking on or near the business worksite or a location from which employees commute to work by driving and then using mass transit.

The ability to pay transit expenses with pretax dollars, within the annual limit, "should be welcomed by employees with high commuter costs, such as those who rely on urban mass transit systems," said Danielle Capilla, director of employee benefits compliance at Alera Group, a network of insurance and financial services firms.