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2017 limits for commuting, adoption and other benefits also announced
Updated on Nov. 15, 2016
Employees will be able to put more income into their health care flexible spending accounts in 2017, when the health FSA contribution limit rises to $2,600.
Other inflation-adjusted benefits caps were also issued by the IRS on the cusp of open-enrollment season for many U.S. companies.
Revenue Procedure 2016-55, released on Oct. 25, includes 2017 dollar limits for qualified transportation benefits and for adoption assistance programs, among others.
The increase in the cost-of-living index—up 1.09 percent between the third quarters of 2015 and 2016—was enough to meet the statutory thresholds that trigger rate adjustments for some employee benefits, but not for others.
The 2017 limit on voluntary employee salary reductions for contributions to health FSAs is rising to $2,600. Employers should communicate the higher cap to employees during open enrollment and include the new limit in their open-enrollment materials—even if they must, at this late date, do so through a printed or online addendum.
Employer contributions. Health FSAs can be funded on a pretax basis by employees, employers or both. The $2,600 limit applies to employee salary deferral contributions. Employer contributions to an employee’s health FSA may be made in addition to the $2,600 allowed for employee contributions. But according to
an analysis by Parker, Smith & Feek, an insurance and risk management brokerage firm with offices in the Pacific Northwest, “although there isn’t technically an annual limitation on employer contributions, health care reform limits employer contributions to $500/year or an arrangement in which the employer contribution will not exceed the employee’s contribution, such as an employer match of employee contributions (up to $2,600).”
In other words, an employer could either provide a matching contribution or limit its annual account contribution to $500, as the law now stands.
Unspent funds. Since 2013, there have been
two options for handling unused funds in a health FSA at year-end that employers can adopt:
Plans can offer either the carryover option or a grace period, but not both, or they can offer neither.
[SHRM members-only toolkit:
Designing and Managing Flexible Benefits (Cafeteria) Plans]
Differences with HSAs. During open enrollment, employees are often
confused about the differences between health FSAs and health savings accounts (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 hold 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 only may be used for dental and vision-care expenses.
Plan documents. Finally, some health FSA plan documents reference a hard-dollar maximum figure, making a plan amendment necessary to increase the dollar limit for future years. A better approach, benefit consultants advise, is for 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.
Dependent Care FSAs
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. It can also be used for elder daycare—when an elderly or disabled parent is considered a dependent and the dependent care 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.
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.
In addition, maximum contributions to a dependent FSA may not exceed these earned income limits:
Qualified Transportation Benefits
The monthly dollar limits under section 132(f) for tax-excludable transit and parking benefits, for tax years beginning in 2017, remain unchanged from 2016.
Long-sought equalization between tax breaks for employer-provided parking and mass-transit benefits was
enacted at the end of 2015.
Related: 2017 Transit and Parking Benefits: Design Programs to Increase Workers’ Engagement.
Adoption Assistance Programs
For qualified adoption assistance programs, the maximum amount excludable from federal income tax withholding in 2017 for reimbursements related to the adoption of a child, limited to necessary and reasonable expenses, is shown below. The excludable amount phases out for taxpayers with modified adjusted gross income that exceeds certain levels:
[SHRM members-only toolkit:
Managing Adoption Assistance Benefits]
Long-Term Care Premiums
The IRS allows individuals to deduct qualified medical expenses that exceed 10 percent of their adjusted gross income for the year. Increases in the limits under tax code Section 213 for eligible long-term care premiums that are deductible in 2017—to the extent that they, along with other unreimbursed medical expenses, exceed 10 percent of the insured's adjusted gross income—are shown below, based on attained age before the close of the taxable year:
The new guidance is in addition to
2017 retirement plan limits that the IRS also released in October. The 2017 limits for
contributions to health savings accounts and for high-deductible health plans were released earlier, in May 2016. Separately, the Social Security Administration announced an
increase in the Social Security taxable wage base and adjustments to income tax brackets for 2017.
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