As you may recall, the Affordable Care Act (ACA) put a cap on Health Care FSA salary reductions in 2013, subject to Consumer Price Index (CPI) adjustments in future years. Any adjustments are based upon the average of the Consumer Price Index as of the close of the 12-month period ending on August 31 of such calendar year.
The CPI was released August 31 and Thomson Reuters has reported today, the projected inflation adjustments for 2017 for health, charitable, compliance and other specialty items.
Most notably a projected increase to the 2017 Health Care FSA Limit of $50 or an annual maximum is $2,600 per plan year.
Keep in mind the following:
- This is a projected increase and the IRS typically announces the official increase to benefit limits the third Thursday in October (10/20/16).
- The new limit would apply for the first plan year on or after 1/1/17.
- The Health Care FSA pre-tax deduction limit is per employee, per employer, per plan year.
- If an employer contributes to the Health Care FSA, the employer’s contribution is in addition to the amount that the employee can elect. The employee can elect up to the salary reduction maximum and still receive the employer’s contribution. The employee could have more than the projected $2,600 available to reimburse expenses if employer contributions are part of the plan design.
- If an employer contribution can be taken as taxable income (cash), the amount is part of the $2,600 limit.
- If an employer has adopted the $500 rollover (carryover) for the Health Care FSA, any amount that rolls over into the new plan year does not affect the maximum election the employee can make.
- An Employer that has the maximum Health Care FSA set as “statutory maximum” will not need to formally amend the cafeteria plan to incorporate the new limit, the increase is automatic.
- An Employer is not required to adopt to the new Health Care FSA increase, and may keep an established Health Care FSA maximum as a specific dollar amount ($2,500 for example) and keep the same limit for 2017. However, if an employer wants to take advantage of the new projected increase to the annual maximum, an employer is required to amend the plan to increase the Health Care FSA maximum.
These benefit adjustments are not official until the IRS releases a Revenue Procedure on this and other benefit limits later this fall, however, we have reason to believe that this $2,600 Health Care FSA limit will be effective for 2017. We will continue to provide updates accordingly.