Many employee benefits are subject to annual dollar limits that are periodically increased for inflation. The Internal Revenue Service (IRS) recently announced cost-of-living adjustments to the annual dollar limits for various welfare and retirement plan limits for 2018. Although some of the limits will remain the same, many of the limits will increase for 2018.
The annual limits for the following commonly offered employee benefits will increase for 2018:
- High deductible health plans (HDHPs) and health savings accounts (HSAs);
- Health flexible spending accounts (FSAs);
- Transportation fringe benefit plans; and
- 401(k) plans.
The Affordable Care Act (ACA) imposes a dollar limit on employees’ salary reduction contributions to health flexible spending accounts (FSAs) offered under cafeteria plans. This dollar limit is indexed for cost-of-living adjustments and may be increased each year.
On Oct. 19, 2017, the Internal Revenue Service (IRS) released Revenue Procedure 2017-58 (Rev. Proc. 17-58), which increased the FSA dollar limit on employee salary reduction contributions to $2,650 for taxable years beginning in 2018. It also includes annual inflation numbers for 2018 for a number of other tax provisions.
Beginning on January 1, 2018, the maximum employee election amounts for FSAs are as follows:
|Health FSA (limit on employees’ pre-tax contributions)||$2,600||$2,650||Up $50|
|Dependent care FSA (tax exclusion)*||$5,000 ($2,500 if married and filing taxes separately)||$5,000 ($2,500 if married and filing taxes separately)||No change|
*Not adjusted for inflation
Transportation Fringe Benefits
|Limit (monthly limits)||2017||2018||Change|
|Transit pass and vanpooling (combined)||$255||$260||Up $5|
Adoption Assistance Benefits
|Tax exclusion (employer-provided assistance)||$13,570||$13,840||Up $270|
Qualified Small Employer HRA (QSEHRA)
|Payments and Reimbursements||Employee-only coverage||$4,950||$5,050||Up $100|
|Family coverage||$10,000||$10,250||Up $250|
|Employee elective deferrals||$18,000||$18,500||Up $500|
|Catch-up contributions||$6,000||$6,000||No change|
On May 5, 2017, the Internal Revenue Service (IRS) released Revenue Procedure 2017-37 to announce the inflation-adjusted limits for health savings accounts (HSAs) and high deductible health plans (HDHPs) for 2018. The limits include: the maximum HSA contribution limit; the minimum deductible amount for HDHPs; and the maximum out-of-pocket expense limit for HDHPs.
These limits vary based on whether an individual has self-only or family coverage under an HDHP. The IRS limits for HSA contributions and HDHP cost-sharing all increased for 2018. The HSA contribution limits will increase effective Jan. 1, 2018, while the HDHP limits will increase effective for plan years beginning on or after Jan. 1, 2018.
HSA and HDHP Limits
|HSA Contribution Limit|
|Self-only HDHP coverage||$3,400||$3,450||Up $50|
|Family HDHP coverage||$6,750||$6,900||Up $150|
|Catch-up contributions*||$1,000||$1,000||No change|
*Not adjusted for inflation
|Minimum deductible||Self-only coverage||$1,300||$1,350||Up $50|
|Family coverage||$2,600||$2,700||Up $100|
|Maximum out-of-pocket||Self-only coverage||$6,550||$6,650||Up $100|
|Family coverage||$13,100||$13,300||Up $200|
Employers should ensure that their health FSA will not allow employees to make pre-tax contributions in excess of $2,650 for 2018, and they should communicate the 2018 limit to their employees as part of the open enrollment process.
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. For example, an employer may decide to continue limiting employee health FSA contributions for the 2018 plan year to $2,500.
Plan documents that specify the health FSA dollar limit must be amended if the higher limit will be used in 2018.
The health FSA limit will potentially be increased further for cost-of-living adjustments in later years.
Per Employee Limit
The health FSA limit applies on an employee-by-employee basis. Each employee may only elect up to $2,650 in salary reductions in 2018, regardless of whether he or she also has family members who benefit from the funds in that FSA. However, each family member who is eligible to participate in his or her own health FSA will have a separate limit. For example, a husband and wife who have their own health FSAs can both make salary reductions of up to $2,650 per year, subject to any lower employer limits.
If an employee participates in multiple cafeteria plans that are maintained by employers under common control, the employee’s total health FSA salary reduction contributions under all of the cafeteria plans are limited to $2,650. However, if an individual has health FSAs through two or more unrelated employers, he or she can make salary reductions of up to $2,650 under each employer’s health FSA.
Salary Reduction Contributions
The ACA imposes the $2,650 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.
In addition, the limit does not impact contributions under other employer-provided coverage. For example, employee salary reduction contributions to an FSA for dependent care assistance or adoption care assistance are not affected by the health FSA limit. The limit also does not apply to salary reduction contributions to a cafeteria plan that are used to pay for an employee’s share of health coverage premiums, to contributions to a health savings account (HSA) or to amounts made available by an employer under a health reimbursement arrangement (HRA).
Grace Period/Carry-over Feature
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 is subject to a grace period, unused salary reduction contributions that are carried over into the grace period do not count against the $2,650 limit applicable to the following plan year.
Also, 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-it-or-lose-it” 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 allow the individual to elect up to $2,650 in salary reductions in addition to the $500 that may be carried over.
For more information on next year’s HSA and FSA changes, call one of the benefit account executives at Roper Insurance today at 303-721-1145 or email them here.