It’s that time of year when companies across industries are looking ahead to the cost-of-living adjustments for 2022 that will apply to employee benefits.
To review, a cost-of-living adjustment — or COLA — is an increase in income or benefits to keep up with rising prices (also known as inflation), and was enacted by legislation in 1973. COLAs allow people to continue to afford goods and services, housing, and taxes as prices go up. Companies often use COLAs to:
- Ensure competitive salaries to attract good employees.
- Help employees relocate to an area with a higher cost of living.
- Increase retirement and other benefits.
The government often applies a COLA to Social Security benefits to guard against inflation. For the upcoming tax year 2022, the projected increase in the cost-of-living adjustment is 5.9%, meaning both Social Security benefits and federal Supplemental Security Income payment levels will increase by 5.9%.
COLAs also effect the maximum reimbursement amounts permissible for certain employee benefits.
Continue reading for an overview of the various methods for calculating COLAs, as well as the adjustments to employee benefits for 2022.
How COLAs Are Calculated
Cost-of-living adjustments can be calculated in a few different ways:
- Consumer price index (CPI). Companies often use CPI to adjust salaries during inflation. CPI is calculated by the Bureau of Labor Statistics (BLS) based on a list of consumer goods and services that the average household uses and the average prices of those items. The BLS calculates CPI each month and for the year — both on a national basis as well as regionally for the South, West, Midwest, and Northeast. Some consider the CPI to be the most accurate cost-of-living calculation.
- Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Social Security Administration uses CPI-W to adjust Social Security and Supplemental Security Income for inflation. The BLS calculates CPI-W by using the same method for calculating CPI, except it looks at the average change over time in the prices of that same list of consumer goods and services that are paid for specifically by clerical workers and urban wage earners.
- Consumer Price Index for All Urban Consumers (CPI-U). This is a measurement of the average change in the prices of consumer goods and services over time and includes a broader category of demographics than the CPI-W — extending to retirees, self-employed professionals, technical workers, and temporary workers.
On November 10, 2021, the IRS announced the tax year 2022 annual inflation adjustments for various benefits. They are as follows:
Health Flexible Spending Accounts (FSAs)
For 2022, the dollar limit on employee salary reduction contributions to health FSAs is $2,850 (up from $2,750). Additionally, 2022 health FSAs may permit a maximum rollover of up to $570 into the following plan year (up from $550).
Qualified Transportation Fringe Benefits
For 2022, the monthly limit on the amount that may be excluded from an employee’s income for qualified parking benefits is increasing to $280 (up from $270). The combined monthly limit for transit passes and commuter vehicle expenses for 2022 will also be $280 (up from $270).
Qualified Small Employer Health Reimbursement Accounts (QSEHRAs)
For 2022, the maximum amount of payments and reimbursements under a QSEHRA can’t exceed $5,450 for individual coverage and $11,050 for family coverage (up from $5,300 and $10,700, respectively).
Small Business Health Care Tax Credit
For 2022, the average annual wage level at which the tax credit begins to phase out for eligible small employers is $28,700 (up from $27,800).
Dependent Care Assistance Program (DCAP)
The $5,000/$2,500 DCAP limit has not changed for calendar year 2022 (as it is a non-indexed limit). The increased limit to $10,500 for calendar year 2021 (under the American Rescue Plan Act of 2021) will not apply to 2022 or future years.
Health Savings Accounts (HSAs)
The limits for health savings accounts (HSAs) for 2022 were announced in May this year. The annual contribution limit for individual coverage is increasing by $50, for a total of $3,650. The annual contribution limit for family coverage is increasing by $100, for a total of $7,300. The catch-up contribution limit for those age 55 and older will remain at $1,000.
Get the Right Guidance
It’s important to apply the 2022 COLA increases for employee benefits accurately, and determine any other impact these adjustments may have on your business. Partnering with an HR solutions provider can help you get the guidance you need.
PrimePay can partner with you to administer pre-tax benefits for your company, no matter the size or choice of plan.
Learn more about how PrimePay can help you offer consumer driven health plans to your employees. Click here to view our breadth of Benefit Services.
Are you an organization with 500 or more employees?
Enhance your employee experience, simplify enrollment, and relieve administrative burdens on the HR team with enterprise-class solutions that improve efficiency, compliance, and marketplace competitiveness.
Click here to learn about our enterprise solution.
Please read our disclaimer here.