The Affordable Care Act (ACA) imposes a dollar limit on employees’ salary reduction contributions to health flexible spending accounts (FSAs) offered under cafeteria plans. This dollar limit is indexed for cost-of-living adjustments and may be increased each year.

On Oct. 27, 2020, the IRS released Revenue Procedure 2020-45 (Rev. Proc. 20-45), which announced that the health FSA dollar limit on employee salary reduction contributions will remain at $2,750 for taxable years beginning in 2021. It also includes annual inflation-adjusted numbers for 2021 for a number of other tax provisions.

Employers should ensure that their health FSAs will not allow employees to make pre-tax contributions in excess of $2,750 for the 2021 plan year, and communicate the 2021 limit to their employees as part of the open enrollment process.

Reminder: HSA and HDHP Limits for 2021

On May 20, 2020, the IRS released Revenue Procedure 2020-32 to provide the inflation-adjusted limits for health savings accounts (HSAs) and high deductible health plans (HDHPs) for 2021. Read the full summary here.

Action Steps

Employers may continue to impose their own dollar limit on employee salary reduction contributions to health FSAs, up to the ACA’s maximum. Employers should communicate their 2021 limit to their employees as part of the open enrollment process.

For more information read the full compliance bulletin linked below.

If you have questions related to this update, please contact your North Risk Partners advisor. Don’t have an advisor? No problem. We’ll help you find one.

This regulatory update is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

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