What do 2021 IRS updates mean for employers?
FSAs can still save participating employees hundreds of dollars per year on their medical-related health care costs.
With new additions to the eligible expenses lists and increased roll over amounts, FSAs have been a hot topic. The IRS just released its 2021 limits, and the maximum is unchanged for 2021.
Flexible Spending Accounts
Each year, the IRS releases increases to the maximum amounts allowed for flexible spending accounts, commuter benefits and adoption assistance pre-tax benefits. On October 26, 2020, the IRS announced limits and updates to these accounts for 2021.
The IRS maximum amount for a 2021 health care flexible spending account (FSA) and limited purpose FSA is $2,750 per year. This is the same maximum as the 2020 limit. The IRS did extend the increased carryover provision to a maximum amount of $550 per year for plans that include carryover. There was no mention or change in the amount of the dependent care FSA, so it remains capped at $5,000 per year, per family.
Several changes were made to FSAs in 2020 as a result of the CARES Act in March and additional guidance in May regarding employers’ ability to modify and increase their FSA carryover amount to $550 for 2020 plans, among other provisions. Another key change was the addition of new eligible expenses. Starting retroactively in January of 2020, FSA participants can claim over-the-counter medications and treatments as well as feminine hygiene items as eligible expenses and receive reimbursement from their health care FSA for those items. These additions to the eligible expense list are not time-bound to the CARES Act or Corona virus relief and are expected to be permanent additions.
Commuter benefits that provide a pre-tax benefit for employees who use mass transit or pay for parking remains unchanged at $270/month for both the transit pre-tax benefit and $270/month for the parking pre-tax benefit.
It has been a tough year for commuters, with 62% of the U.S. workforce spending at least some time doing remote work, and many offices doing slow or phased re-openings. There are several regions that mandate commuter benefits; however, and to stay compliant with the laws, employers should consider continuing to offer this benefit in these areas if you have employees who work and/or commute there. Currently, there are mandates in the following areas: New Jersey (state); Seattle, WA; San Francisco; San Francisco Bay Area; Berkeley & Richmond, CA; New York City and Washington, D.C. The mandates vary by number of employees required in each location, so be sure to review your local ordinances for more details. See our August blog about navigating COVID and commuter benefits.
Adoption Assistance Programs
Adoption assistance programs may now reimburse employees up to $14,440 in a pre-tax adoption assistance fund to help the employee cover adoption-related costs, such as court costs, legal and agency fees and counseling fees. This amount is up from $14,300 for 2020. Taxpayers may also exclude from income qualified adoption expenses paid or reimbursed by an employer, up to the same limit as the credit. Taxpayers can use the tax credit and the income exclusion but cannot claim the same expenses for both.
There is an exclusion on the adoption assistance credit based on employee salary. The amount excludable from an employee's annual earnings begins to phase out for employees with modified adjusted gross income higher than $216,660 and is completely phased out for those with modified adjusted gross income of $256,660.
These kinds of consumer accounts are crucial during times of economic uncertainty and go a long way toward providing help toward employees who face unexpected expenses or who need to make sure they’re stretching every dollar.
For the IRS bulletin regarding these updates, refer to https://www.irs.gov/pub/irs-drop/rp-20-45.pdf.
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