The Affordable Care Act (ACA) imposes a dollar limit on employees’ salary reduction contributions to health flexible spending accounts, or FSAs, offered under cafeteria plans. For 2020, the health FSA limit on employees’ pre-tax contributions increased by $50 — from $2,700 to $2,750.
On October 27, 2020, the Internal Revenue Service (IRS) released Revenue Procedure 2020-45, announcing that the health FSA dollar limit on employee salary reduction contributions will remain at $2,750 for the 2021 plan year. It also includes 2021 inflation-adjusted numbers for several other tax provisions.
A health FSA limit applies on an employee-by-employee basis. In 2021, each employee may only elect up to $2,750 in contributions. Each family member who is eligible to participate in the FSA, will have a separate limit from the employee. Meaning, both the member and their spouse who have their own health FSA will each be able to make salary reductions of up to $2,750 per year. This dollar limit is indexed for cost-of-living adjustments and may be increased each year.
Employers, however, may impose their own dollar limit on employee salary reduction contributions to health FSAs, up to the ACA’s maximum. They are encouraged to communicate the 2021 limit to their employees and ensure they understand that their health FSA contributions cannot exceed $2,750.
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