Health FSA Limits & Features
If your employer offers a flexible spending arrangement, commonly known as an FSA, you’ve probably heard by now about the limits for 2015. Next year, the dollar limitation on employee salary reduction contributions to FSAs will be $2,550. The amount is a $50 increase from 2014. The health FSA limit will potentially be further increased for cost-of-living adjustments for later years.
An FSA is an account you can put money into and use for certain out-of-pocket health care costs. The funds can be used to pay for certain medical and dental expenses, including copayments and deductibles. So, how does the Internal Revenue Service define an FSA? According to the government agency, health FSAs are employer-established benefit plans which may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Employers also have complete flexibility to offer various combinations of benefits in their plan design, while employees do not have to be covered under any health plan to participate. One exception to the rule applies to self-employed persons, who are not eligible for an FSA.
How do you contribute to your FSA? Employees elect an amount to be voluntarily withheld from their pay, sometimes called a salary reduction agreement. If noted in the plan, employers have the option of contributing to your FSA. Under IRS guidelines, you do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA.
There are some limits placed on FSAs for both employers and employees as discussed below.
An employer may continue to impose its own dollar limit on employees’ salary reduction contributions to a health FSA, as long as the employer’s limit does not exceed the ACA’s maximum limit in effect for the plan year.
For example, an employer may decide to continue limiting employee health FSA contributions for the 2015 plan year to $2,500.
Per Employee Limit
The health FSA limit applies on an employee-by-employee basis. Each employee may only elect up to $2,550 in salary reductions for 2015, regardless of whether he or she also has family members who benefit from the funds in that FSA. However, each family member who is eligible to participate in his or her own health FSA will have a separate limit.
For example, a husband and wife who have their own health FSAs can both make salary reductions of up to $2,550 per year, subject to any lower employer limits.
If an employee participates in multiple cafeteria plans that are maintained by employers under common control, the employee’s total health FSA salary reduction contributions under all of the cafeteria plans are limited to $2,550. However, if an individual has health FSAs through two or more unrelated employers, he or she can make salary reductions of up to $2,550 for 2015 under each employer's health FSA.
Salary Reduction Contributions
The ACA imposes the $2,550 limit for 2015 on health FSA salary reduction contributions. Non-elective employer contributions to a health FSA (for example, matching contributions or flex credits) generally do not count toward the ACA’s dollar limit. However, if employees may 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 ACA’s dollar limit. In addition, the limit does not impact contributions under other employer-provided coverage.
For example, employee salary reduction contributions to an FSA for dependent care assistance or adoption care assistance are not affected by the health FSA limit. The limit also does not apply to salary reduction contributions to a cafeteria plan that are used to pay for an employee’s share of health coverage premiums, to contributions to a health savings account (HSA) or to amounts made available by an employer under a health reimbursement arrangement (HRA).
Grace Period/Carryover Feature
A cafeteria plan may include a grace period of up to two months and 15 days immediately following the end of a plan year. If a plan includes a grace period, an employee may use amounts remaining from the previous plan year, including amounts remaining in a health FSA, to pay for expenses incurred for certain qualified benefits during the grace period. If a health FSA is subject to a grace period, unused salary reduction contributions that are carried over into the grace period do not count against the $2,550 limit applicable to the following plan year.
Also, if a health FSA does not include a grace period, it may allow participants to carry over up to $500 in unused funds into the next plan year. This is an exception to the “use-or-lose” rule that generally prohibits any contributions or benefits under a health FSA from being used in a following plan year or period of coverage. A health FSA carryover does not affect the limit on salary reduction contributions. This means the plan may permit the individual to elect up to $2,550 for 2015 in salary reductions in addition to the $500 that may be carried over.