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The IRS recently increased the health FSA dollar limit on employee salary reduction contributions for 2020 plan years. According to the Affordable Care Act (ACA), a dollar limit is imposed 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.
For taxable years beginning in 2020, the health FSA dollar limit on employee salary reduction contributions has increased to $2,750. It also includes annual inflation numbers for 2020 for a number of other tax provisions.
The health FSA limit applies on an employee-by-employee basis. Employees may only elect up to $2,750 in salary reductions in 2020, regardless of whether they have family members who benefit from the FSA funds. Each family member who is eligible to participate in their own health FSA will have a separate limit.
Employers should ensure that their health FSA doesn’t allow employees to make pre-tax contributions in excess of $2,750 for 2020. Communicate the increased limit to employees during the open enrollment process.
An employer may continue to impose its own health FSA limit, as long as it doesn’t exceed the ACA’s maximum limit in effect for the plan year. This means that an employer could continue to use the 2019 maximum limits for its 2020 plan year.
For more information, download the bulletin.