2021 FSA Contribution Cap Stays at $2,750

​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).

Health FSAs

The chart below shows the adjustment in health FSA contribution limits since 2019.

Health Flexible Spending Accounts
(includes limited-purpose FSAs)
2021 2020 2019
Maximum salary deferral contribution $2,750 $2,750 $2,700

Source: Revenue Procedure 2020-45

Under rounding rules, benefit-contribution limits with annual COLAs remained unchanged if statutory price-increase thresholds are not met.

“The manner in which the IRS computes the cost-of-living adjustments for tax provisions is governed by the Internal Revenue Code,” said William Sweetnam, legislative and technical director at the Employers Council on Flexible Compensation, which represents sponsors of account-based benefit plans. “Consequently, the result of low inflation is that limits may not increase every year, like this one.”

Increased Carryover Cap

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:

  • Carryover. If an FSA plan has the carryover feature, participants can roll over up to $550 of unused FSA dollars to the next year but will forfeit any excess over $550 at year-end.
  • Grace period. An optional grace period gives employees an additional two-and-a-half months to incur new expenses using prior-year FSA funds. At the end of the grace period in mid-March, all unspent funds must be forfeited.

Also issued May 12, and for plan years ending before Dec. 31, 2020 only, IRS Notice 2020-29 allows employers to amend a health or dependent care FSA plan to permit participants to “spend down” through year-end 2020 any remaining amounts that would otherwise be forfeited.

Dependent Care FSAs

A dependent care FSA is a pretax benefit account used to pay for dependent care services such as day care, preschool, summer camps and nonemployer-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. 

The dependent care FSA maximum, which is set by statute and is not subject to inflation-related adjustments, is $5,000 a year for individuals or married couples filing jointly, or $2,500 for a married person filing separately. Married couples have a combined $5,000 limit, even if each has access to a separate dependent care FSA through his or her employer.

In addition, maximum contributions to a dependent FSA may not exceed these earned income limits:

  • For single account holders, the earned income limit is their salary excluding contributions to their dependent care FSA.
  • For married account holders, the earned income limit is the lesser of their salary excluding contributions to their dependent care FSA or their spouse’s salary.

A separate tax code child and dependent care tax credit cannot be claimed for expenses paid through a dependent care FSA, as “double dipping” is not permitted.

Elder care may be eligible for reimbursement with a dependent care FSA if the adult lives with the FSA holder at least 8 hours of the day and is claimed as a dependent on the FSA holder’s federal tax return.

[SHRM member-only HR Q&A: What is a dependent care assistance plan (DCAP)?]

Commuting Benefit Amounts

Employer-funded parking and mass-transit subsidies are tax-exempt for employees. Using pretax income, employees can also pay their own mass-transit or workplace parking costs through an employer-sponsored salary deferral program.

These expenses include the value of mass-transit passes and van pooling services, and parking on or near the business worksite or a location from which employees commute to work by driving and then using mass transit.

Qualified Transportation Benefit Exclusion
(monthly limits)
2021 2020 2019
Transit passes and van pool services $270 $270 $265
Qualified parking $270 $270 $265

Source: Revenue Procedure 2020-45

The ability to pay transit expenses with pretax dollars, within the annual limit, “should be welcomed by employees with high commuter costs, such as those who rely on urban mass transit systems,” said Danielle Capilla, director of employee benefits compliance at Alera Group, a network of insurance and financial services firms.

In 2018, tax legislation eliminated the business deduction for qualified mass-transit and parking benefits.

“On its own, the lack of a tax deduction for employers may seem like a disadvantage to offering these benefits, although some employers would still need to do so to stay competitive and to comply with state and local laws,” said Bobbi Kloss, HR leader at Benefit Advisors Network (BAN), a consortium of health and welfare benefit brokers.

Adoption Assistance

For 2021, the maximum amount of an employer subsidy for qualified child-adoption expenses that can be excluded from an employee’s gross income is $14,400, up from $14,300 for 2020.

Excludable reimbursements must be “necessary and reasonable expenses” related to adopting a child, according to the IRS. Qualified adoption expenses, however, don’t include expenses that employees pay to adopt their spouse’s child.

The amount excludable from an employee’s annual earnings begins to phase out for employees with modified adjusted gross income higher than $216,660 (up from $214,520 for 2020) and is completely phased out for those with modified adjusted gross income of $256,660 (up from $254,520 or more).

Adoption Benefits
(Annual limits)
2021 2020 2019
Excludable amount $14,400 $14,300 $14,080
Phase-out income thresholds:  
Phase-out begins $216,660 $214,520 $211,160
Phase-out complete $256,660 $254,520 $251,160

Source: Revenue Procedure 2020-45

“Adoption benefits typically include some combination of financial assistance, information and referral services, and paid or unpaid leave,” according to the Society for Human Resource Management’s members-only toolkit Managing Adoption Assistance Benefits. “Adopting a child from foster care may cost about $2,500, domestic private adoptions can cost up to $40,000, and international adoptions can cost up to $50,000. Costs may include public or private agency fees, court costs, legal fees and counseling fees.”

Employer programs can provide funds to reimburse adoption costs that exceed the annual limit, although employees will owe income taxes on any extra assistance they received.

Adoption Tax Credit vs. Employer Assistance

The tax code provides a separate income-tax credit for qualified adoption expenses. For 2020, the maximum credit is $14,400 per child—the same as the maximum nontaxable reimbursement by an employer’s qualified adoption-assistance program—up from $14,300 per child in 2020. Tax credits larger than an employees’ tax liability can be carried forward for up to five years.

Employees may take advantage of both the tax credit and the tax exclusion for employer reimbursements—but not for the same expenses.

Because employer-provided adoption aid is subject to FICA payroll taxes, some financial planners advise that high-income employees consider using the tax credit first, although employees who need upfront funds to pay expenses may benefit more from an employers’ program.

Qualified Small Employer HRAs

For taxable years beginning in 2021, to qualify as a qualified small employer health reimbursement arrangement (QSEHRA), the arrangement must provide that the total amount of payments and reimbursements by employers for any year cannot exceed $5,300 for individual coverage or $10,700 for family coverage, Revenue Procedure 2020-45 states.

QSEHRA Coverage
(Annual limits)
2021 2020 2019
Individual $5,300 $5,250 $5,150
Family $10,700 $10,600 $10,450

Source: Revenue Procedure 2020-45

QSEHRAs first became available in 2017 after the enactment of the 21st Century Cures Act. They allow small employers—those with fewer than 50 full-time or equivalent employees—to give their workers money tax-free to purchase individual health policies, which is not allowed with a traditional HRA or an HSA. The coverage can be purchased on an Affordable Care Act marketplace exchange or through an insurance broker.

As with a regular HRA or an HSA, QSEHRA funds can be used for out-of-pocket medical costs, and they can also be used to pay all or part of the plan premiums.

Related SHRM Articles:

IRS Allows Midyear Enrollment and Election Changes for Health Plans and FSAs, SHRM Online, May 2020

Commuter Benefits Are an Investment in Employees, SHRM Online, October 2019

QSEHRAs Help Small Employers Solve the Health Care Coverage Puzzle, SHRM Online, May 2019

Related SHRM Resource:

Open Enrollment Guide & Resources (2021 Inflation-Adjusted Limits & Thresholds)

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