2021 FSA Contribution Cap Stays at $2,750

For 2021, the dollar limit for employee contributions to health flexible spending accounts (health FSAs) through salary reductions remains unchanged at $2,750, the IRS announced on Oct. 27 when it issued Revenue Procedure 2020-45.

For health FSA plans that permit the carryover of unused amounts, the maximum carryover amount for 2021 is $550, an increase of $50 from the original 2020 carryover limit.

The guidance also includes annual cost of living adjustments (COLAs), if any were made, for other employee benefit plans. For instance, for tax year 2021, the monthly limit for qualified transportation benefits remains $270, as is the monthly limit for qualified parking.

The IRS a day earlier announced 2021 contribution limits for 401(k) and similar defined contribution plans and annual limit adjustments for defined benefit pension plans.

The IRS released 2021 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 $3,600 (up from $3,550) and the family contribution limit will be $7,200 (up from $7,100).

Increased Carryover Cap

IRS Notice 2020-33, issued on May 12 as part of COVID-19 relief, raised the amount of funds that health FSA plans can carry over for 2020 to $550, up from $500. For 2021, the maximum carryover amount remains $550.

There are two options for FSA extensions; employers can adopt either or neither, but can’t offer both:

• Carryover. If an FSA plan has the carryover feature, participants can roll over up to $550 of unused FSA dollars to the next year but will forfeit any excess over $550 at year-end.
• Grace period. An optional grace period gives employees an additional two-and-a-half months to incur new expenses using prior-year FSA funds. At the end of the grace period in mid-March, all unspent funds must be forfeited.