On Oct. 19, the Internal Revenue Service increased the limit for health flexible spending accounts by $50 to a total of $2,650 for 2018. The change was noted in Revenue Procedure 2017-58 and was a result of a 2.2 percent raise in the 12 month cost-of-living index that ended in September. The inflation adjustment also saw increases in caps for other benefits such as adoption assistance programs and qualified transportation benefits.
Employers are encouraged to inform staff of higher limits during the open enrollment period and include notice of the change in open enrollment materials. Because of the late issuance, it may be necessary to release an online or printed FSA addendum.
"FSA limits have been raised by $50 annually since 2013."
A flexible spending account is part of an employee benefits package, and untaxed money is added to an account. Money within can be spent on certain out-of-pocket medical expenses, according to Healthcare.gov. Specific applications of the account include copayments and deductibles, prescription medications and medical equipment such as blood sugar testing kits and crutches.
FSA limits have been raised by $50 annually since 2013 and could potentially be increased further by the cost-of-index adjustments in the coming years.
Money in the health FSA can be used by employees and anyone they list as a dependent, such as a spouse or children. However the maximum amount remains the same regardless of the number of dependents. Employees in the same household are eligible for their own individual accounts, each with a separate $2,650 limit.
Employers hold the right to set their own FSA cap, so long as they do not exceed the amount set by federal standard. For instance, an employer could keep their FSA limit set at the 2017 amount for the 2018 plan year.
Employer matches and grace periods
Employers can also contribute to employee FSAs. Employer contributions can be equal to double the employee contribution up to the account limit for that year. For instance, an employee can add up to $2,650 to their account this year and have that matched by their employer, bringing the account's total to $5,300.
However, in cases where employees add less than $500 to the FSA, employers can add up that total even if it is more than the employee's contribution; an example being an employee adds $300, their employer can grant them up to $500.
The Affordable Care Act also sets the $2,650 cap on health FSA salary reductions. Employers that match employee contributions do not count toward the dollar limit. If employees have the option to receive employer contributions as cash or taxable benefits, those grants will be seen as salary reductions and will add to the ACA account cap.
Each annual plan has a start and end date, and money in the account must be used within that time, after which it will be forfeited. But employers can offer one of two options alter this rule:
- Employees can be granted a grace period of up to two and half months to use the remaining balance in the account.
- Up to $500 of the previous year's balance can be carried over to the following year's account.