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The IRS has announced the 2025 contribution limits for items like flexible spending accounts (FSA). Here’s a look at some of the items changing:
Employees will be able to sock away more money in their health savings accounts (HSAs) next year, thanks to rising inflation.
The annual limit on HSA contributions for self-only coverage in 2025 will be $4,300, a 3.6 percent increase from the $4,150 limit in 2024, the IRS announced May 9. For family coverage, the HSA contribution limit will jump to $8,550, up 3 percent from $8,300 in 2024.
Meanwhile, for 2025, a high-deductible health plan (HDHP) must have a deductible of at least $1,650 for self-only coverage, up from $1,600 in 2024, or $3,300 for family coverage, up from $3,200, the IRS noted. Annual out-of-pocket expense maximums (deductibles, co-payments and other amounts, but not premiums) cannot exceed $8,300 for self-only coverage in 2025, up from $8,050 in 2024, or $16,600 for family coverage, up from $16,100.
The IRS also announced that the excepted-benefit HRA limit will be $2,150 in 2025, up from $2,100.
Many industry experts tout HSAs as a smart way for employees to save for medical expenses, even in retirement, citing their triple tax benefits: Contributions are made pretax, the money in the accounts grows tax free and withdrawals for qualified medical expenses are tax free.
The increased annual limits from the IRS come as HSA enrollment continues to grow, and as more employers offer contributions to employees’ accounts. HSA assets hit a record in 2023, surging to $123.3 billion last year, up nearly 19 percent from the previous record of $104 billion in 2022, according to an annual report by Devenir Group, an HSA research firm and investment consultant firm.
Jon Robb, senior vice president of research and technology at Devenir, said that growth of HSA assets “project a strong, upward trajectory for the future, indicating a steady and significant expansion of the HSA market.”
SHRM’s 2023 Employee Benefits Survey found that 64 percent of employer respondents offer a high-deductible health plan that is linked with a savings or spending account, like an HSA. That is the second most common type of health plan offered, behind a preferred provider organization plan, offered by 82 percent of employers. Among employers that do offer HSAs, 63 percent offer contributions to their employees’ accounts. The average individual-only annual contribution is $1,012, according to SHRM, while the average family annual contribution is $1,585.
Another recent report from the Employee Benefit Research Institute found that employer involvement in HSAs has a positive effect on employee’s account success. HSA holders who received employer contributions had higher balances and were more likely to invest.
HSA annual limits are released every April or May by the IRS—ahead of other limits such as flexible spending accounts and 401(k) contributions— giving employers and HSA administrators plenty of time to adjust their systems. Employers often promote HSAs and encourage employees to boost their contributions during open enrollment, though it would be a good idea for HR and benefits leaders to start that conversation now.
The IRS has released Revenue Procedure 2023-34 confirming that for plan years beginning on or after January 1, 2024, the health FSA salary reduction contribution limit will increase to $3,200.
The adjustment for 2024 represents a $150 increase to the current $3,050 health FSA salary reduction contribution limit in 2023.
What About the Carryover Limit into 2025?
The indexed carryover limit for plan years starting in calendar year 2024 to a new plan year starting in calendar year 2025 will increase to $640.
Other Notable 2024 Health and Welfare Employee Benefit Amounts
Employees can put an extra $200 into their health care flexible spending accounts (health FSAs) next year, the IRS announced on Oct. 18, as the annual contribution limit rises to $3,050, up from $2,850 in 2022. The increase is double the $100 rise from 2021 to 2022 and reflects recent inflation.
If the employer’s plan permits the carryover of unused health FSA amounts, the maximum carryover amount rises to $610, up from $570. 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 2023 HSA contribution limits in April, giving employers and HSA administrators plenty of time to adjust their systems for the new year. The individual HSA contribution limit will be $3,850 (up from $3,650) and the family contribution limit will be $7,750 (up from $7,300).
CARRYOVER AMOUNTS OR GRACE PERIOD
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.
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, although COVID-19 legislation permitted a carryover of unused balances for DC-FSAs into the next plan year for plan years 2020 and 2021 only.
The dependent care FSA maximum annual contribution limit is not indexed and did not change for 2022 or for 2023. It remains $5,000 per household 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:
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.
The IRS has released the 2022 contribution limits for FSA and several other benefits in Revenue Procedure 2021-45. The limits are effective for plan years that begin on or after January 1, 2022.
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).
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:
This week the IRS released two new sets of rules impacting Section 125 Cafeteria Plans. Notice 2020-33 provides permanent rule changes that include an increase in the amount of unused benefits that Health FSA plans may allow plan participants to rollover from one plan year to the next. Notice 2020-29 provides temporary rules designed to improve employer sponsored group health benefits for eligible employees in response to the coronavirus pandemic. The relief provided under each notice is optional for employers. Employers who choose to take advantage of any of the offered plan options will be required to notify eligible employees and will eventually be required to execute written plan amendments.
Notice 2020-33 modifies the amount of annual rollover of unused benefits that Health FSA plans may offer to Plan participants. Up until now, rollovers have been limited to $500 per Plan Year. The new rule sets the annual rollover limit to 20% of the statutory maximum annual employee Health FSA contribution for the applicable Plan Year. Because the statutory maximum is indexed for inflation, most years it increases (in mandated increments of $50).
The notice provides that the increased rollover amount may apply to Plan Years beginning on or after January 1, 2020. Because the corresponding annual Health FSA employee contribution limit for those Plan Years is $2,750, the annual rollover limit may be increased up to $550.
The relief provided under Notice 2020-29 falls into two major categories, both of which apply only for calendar year 2020. First, the IRS introduces several significant exceptions to the mid-year change of election rules generally applicable to Section 125 Cafeteria Plans. Second, the notice contains a special grace period which offers Health Flexible Spending Arrangement (FSA) and Dependent Care Assistance Program (DCAP) Participants additional time to incur eligible expenses during 2020.
The temporary exceptions to mid-year participant election change rules for 2020 authorize employers to allow employees who are eligible to participate in a Section 125 Cafeteria Plan to:
None of the above described election changes require compliance with the consistency rules which typically apply for mid-year Section 125 Cafeteria Plan election changes. They also do not require a specific impact from the coronavirus pandemic for the employee.
Employers have the ability to limit election changes that would otherwise be permissible under the exceptions permitted by Notice 2020-29 so long as the limitations comply with the Section 125 non-discrimination rules. For allowable Health FSA or DCAP election changes, employers may limit the amount of any election reduction to the amount previously reimbursed by the plan. Interestingly, even though new elections to make Health FSA and DCAP contributions may not be retroactive, Notice 2020-29 provides that amounts contributed to a Health FSA after a revised mid-year election may be used for any medical expense incurred during the first Plan Year that begins on or after January 1, 2020.
For the election change described in item 3 above, the enrolled employee must make a written attestation that any coverage being dropped is being immediately replaced for the applicable individual. Employers are allowed to rely on the employee’s written attestation without further documentation unless the employer has actual knowledge that the attestation is false.
The special grace period introduced in Notice 2020-29 allows all Health FSAs and DCAPs with a grace period or Plan Year ending during calendar year 2020 to allow otherwise eligible expenses to be incurred by Plan Participants until as late as December 31, 2020. This temporary change will provide relief to non-calendar year based plans. Calendar year Health FSA plans that offer rollovers of unused benefits will not benefit from this change.
The notice does clarify that this special grace period is permitted for non-calendar year Health FSA plans even if the plan provides rollover of unused benefits. Previous guidance had prohibited Health FSA plans from offering both grace periods and rollovers but Notice 2020-29 provides a limited exception to that rule.
The notice raises one issue for employers to consider before amending their plan to offer the special grace period. The special grace period will adversely affect the HSA contribution eligibility of individuals with unused Health FSA benefits at the end of the standard grace period or Plan Year for which a special grace period is offered. This will be of particular importance for employers with employees who may be transitioning into a HDHP group health plan for the first time at open enrollment.
As mentioned above, employers wishing to incorporate any of the allowable changes offered under Notices 2020-29 and 2020-33 will be required to execute written amendments to their Plan Documents and the changes should be reflected in the Plan’s Summary Plan Description and/or a Summary of Material Modification. Notice 2020-29 requires that any such Plan Amendment must be executed by the Plan Sponsor no later than December 31, 2021.
The Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) was signed into law by the President on Friday.
There are three direct inclusions that immediately expand the usage of health savings accounts (HSA), flexible spending accounts (FSA), and health reimbursement arrangements (HRA) for employees.
1. Telehealth services can now be covered pre-deductible under a High Deductible Health Plan. The end date of this provision is Dec 21, 2021.
2. Over the counter (OTC) drugs and medicines are now eligible for reimbursement from an HSA, FSA or HRA. This is a permanent change.
3. Menstrual products are now eligible for reimbursement from an HSA, FSA or HRA. This is a permanent change.
Under the Affordable Care Act, (ACA) a fund for a new nonprofit corporation to assist in clinical effectiveness research was created. To aid in the financial support for this endeavor, certain health insurance carriers and health plan sponsors are required to pay fees based on the average number of lives covered by welfare benefits plans. These fees are referred to as either Patient-Centered Outcome Research Institute (PCORI) or Clinical Effectiveness Research (CER) fees.
The applicable fee was $2.26 for plan years ending on or after October 1, 2016 and before October 1, 2017. For plan years ending on or after October 1, 2017 and before October 1, 2018, the fee is $2.39. Indexed each year, the fee amount is determined by the value of national health expenditures. The fee phases out and will not apply to plan years ending after September 30, 2019.
As a reminder, fees are required for all group health plans including Health Reimbursement Arrangements (HRAs), but are not required for health flexible spending accounts (FSAs) that are considered excepted benefits. To be an excepted benefit, health FSA participants must be eligible for their employer’s group health insurance plan and may include employer contributions in addition to employee salary reductions. However, the employer contributions may only be $500 per participant or up to a dollar for dollar match of each participant’s election.
HRAs exempt from other regulations would be subject to the CER fee. For instance, an HRA that only covered retirees would be subject to this fee, but those covering dental or vision expenses only would not be, nor would employee EAPs, disease management programs and wellness programs be required to pay CER fees.