On October 26, 2020, the Internal Revenue Service (IRS) announced annual cost-of-living adjustments affecting the maximum contribution limits for several pre-tax benefits, including health flexible spending accounts (health FSAs) and transit/parking accounts.

In Revenue Procedure 2020-45, the IRS confirmed that for plan years beginning on or after Jan. 1, 2021, the contribution limit for health FSAs will remain at $2,750. For those plans that allow a rollover of unused funds, the maximum rollover amount remains at $550 for 2021, as adjusted earlier this year.

Additionally, the monthly contribution and reimbursement limit for transit and parking FSAs remains at $270 per account in 2021.

The 2021 limit for health savings accounts (HSAs) was previously announced in Revenue Procedure 2020-32. Please see the chart below for a summary of these changes for the new year.

IRS Releases FSA Contribution Limits for 2021

Remember, FSA funds are meant to be used within a plan year. Generally, the plan year must be a fixed 12-month period. Keep in mind that health FSAs have a “use-or-lose” rule, “meaning that any funds left unused at the end of the year are forfeited to the employer.”

There are two exceptions to this rule imposed by the IRS: Rollover and grace period. If funds are not used by the end of the year, $550 can be rolled over into the next plan year. Alternatively, an employer can adopt a grace period for their health FSA. As explained by the IRS, “a grace period is a period of up to two months and 15 days immediately following the end of a plan year during which a participant may use amounts remaining from the previous plan year (including amounts remaining in a health FSA) to pay expenses incurred for certain qualified benefits during that two-month and 15-day period.” According to the U.S. Department of the Treasury, “a health FSA cannot, however, have both a carryover and a grace period.”

For additional FSA facts, read our previous blog titled, “Is an FSA Worth it for Your Small Business,” by clicking here.

How can PrimePay help?

PrimePay helps with the administration of pre-tax benefits for your company, including HRAs, HSAs, and FSAs. When you choose PrimePay’s pre-tax benefit plan administration, you receive a dedicated service team, access to our support portal, automated claims processing, and a PrimePay debit card and mobile app.

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Disclaimer: Please note that this is not all inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding specific application of the information to your own plan.