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FSA Health Contribution Cap Increases to $2,850 for 2022

On November 10, 2021, the Internal Revenue Service (IRS) announced that employees would have the ability to add an extra $100 to their healthcare flexible spending accounts (FSAs) for the next benefit plan year by increasing the contribution cap from $2,750 to $2,850. In addition, the IRS has also increased the unused amount of funds that an employee may rollover into the next benefit plan year without affecting their maximum contribution amount. Not all employer plans allow for a carryover into the following year, however, active COVID-19 legislation may still allow for an employee to carryover unused funds, regardless of the plan’s ability.

Per current legislation, both dependent care and healthcare FSA plans can add a grace period of up to two and a half months that would allow the employee to incur new expenses using the prior-year’s unused funds. At the end of the grace period, all unspent funds must be forfeited. A healthcare FSA also can add the option of allowing for a rollover of up to 20% of the annual contribution limit. Plans can offer either a grace period or the carryover feature, but not both.

Many would agree that the COVID pandemic has brought a strain on the wallets of employees. However, through the passing of the Consolidated Appropriations Act at the end of 2020, and guidance issued in IRS Notice 2021-15, the federal government sought to offer relief to those who took advantage of FSA programs. Specifically, by:

  • Permitting participants in dependent care and healthcare FSAs to carry over unused balances from a plan year ending in 2020 to a plan year ending in 2021, and to carry over unused balances from a plan year ending in 2021 to a plan year ending in 2022.
  • Lengthening the grace period for individuals to utilize unused funds from the previous plan year, from two and a half months to 12 months, for the plan years ending in 2020 and 2021.
  • Allowing employees who ceased contributing to a healthcare FSA plan during the 2020 or 2021 plan years, to continue to utilize any unused funds through the end of the plan year that they stopped contributing, including the above-mentioned extended grace period (if applicable).
  • Granting the use of dependent care FSA funds for children who normally would “age out” of eligibility at 13 has been increased to age 14 for the 2021 plan year. However, this would only apply to any unused dependent care FSA funds that were unused from the 2020 plan year.

Next Steps for Employers

Considering that most employers are either in the midst of their annual benefit enrollment period or have very recently had it come to a close, whether or not updates can be made will depend on the employer’s offerings. Ultimately, it would be recommended for employers to review their individual plan documentation and/or check with their carriers to determine if their plan will allow for any last-minute changes because of the late notice from the IRS and make any necessary updates.

HR Works, headquartered in Upstate New York, is a human resource management outsourcing and consulting firm serving clients throughout the United States for over thirty years. HR Works provides scalable strategic human resource management and consulting services, including: affirmative action programs; benefits administration outsourcing; HRIS self-service technology; full-time, part-time and interim on-site HR managers; HR audits; legally reviewed employee handbooks and supervisor manuals; talent management and recruiting services; and training of managers and HR professionals.