On Wednesday, November 6, the Internal Revenue Service (IRS) announced the health flexible spending account (FSA) maximum for 2020 as part of Revenue Procedure 2019-44. The maximum employee contribution to health FSAs will be $2,750 for taxable years beginning in 2020, up $50 from 2019.
Non-elective employer contributions to health FSAs (for example, matching contributions or flex credits) generally do not count toward this limit. However, if employees can elect to receive the employer contributions in cash or as a taxable benefit, then the contributions will be treated as salary reductions and will count toward the limit.
Health FSA plans are permitted to offer either a grace period or a carryover feature—but not both. Neither of these features affects the maximum employee salary reduction.
A grace period gives an employee an additional two months and 15 days, immediately following the end of a plan year, to incur new expenses. Any amounts remaining at the end of the grace period must be forfeited. Amounts carried over into the grace period do not count toward the $2,750 limit applicable to the following plan year.
The carryover feature allows employees to roll over up to $500 of unused FSA dollars to the next year. Such a carryover does not affect the limit on salary reduction contributions. This means the plan may allow the individual to elect up to $2,750 in salary reductions in addition to the $500 that may be carried over.
Employers are not required to adopt the IRS health FSA maximum and may instead adopt a different maximum limit for the plan year, as long as it does not exceed the IRS’s maximum limit. For example, an employer could set its health FSA limit at $2,000 or $2,500. All employers should look at what is stated in their plan materials and determine whether an amendment is required.
The above information does not constitute advice. Always contact your employee benefits broker or trusted adviser for insurance-related questions.