Effective for plan years beginning on or after Jan. 1, 2013, the Affordable Care Act (ACA) imposes a dollar limit on employees’ salary reduction contributions to health flexible spending accounts (FSAs) offered under cafeteria plans. The ACA set the health FSA contribution limit at $2,500. For years after 2013, the dollar limit is indexed for cost-of-living adjustments.

2014: For taxable years beginning in 2014, the dollar limit on employee salary reduction contributions to health FSAs remained unchanged at $2,500.

2015: For taxable years beginning in 2015, the dollar limit on employee salary reduction contributions to health FSAs increased by $50, for a total of $2,550.

2016: On Oct. 21, 2015, the Internal Revenue Service (IRS) released Revenue Procedure 2015-53, which includes the annual inflation numbers for 2016 for a number of tax provisions, including the health FSA limit. According to this guidance, for taxable years beginning in 2016, the dollar limit on employee salary reduction contributions to health FSAs will remain unchanged at $2,550.

The health FSA limit will potentially be increased further for cost-of-living adjustments for later years.

Additional points:

• An employer may continue to impose its own dollar limit on employees’ salary reduction contributions to health FSAs, as long as the employer’s limit does not exceed the ACA’s maximum limit in effect for the plan year.
• The ACA imposes the $2,550 limit on health FSA salary reduction contributions. Non-elective employer contributions to health FSAs (for example, matching contributions or flex credits) generally do not count toward the ACA’s dollar limit. However, if employees are allowed to 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.
• 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 any amounts remaining in a health FSA, to pay for expenses incurred for certain qualified benefits during the grace period.
• If a health FSA does not include a grace period, it may allow participants to carry over up to $500 of 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 in salary reductions in addition to the $500 that may be carried over.

Contact your NEEBCo representative with questions on tax sheltered savings accounts.