Health flexible spending accounts (FSAs) are a very valuable benefit to many employees, especially as employers have increased employee cost sharing with higher deductibles, coinsurance and co-payments.
Employees can use the FSA to reimburse those out-of-pocket costs on a tax-favored basis. Employees also find FSAs valuable in helping to pay the costs of non-covered services like Lasik eye surgery and services such as vision, hearing and dental care.
Prior to the Affordable Care Act (ACA) employers could offer FSAs without any cap on the maximum employee contribution. However, most employers included an annual cap, typically in the range of $3,000 to $5,000. But effective in 2013 the ACA changed the health FSA rules and required a cap on pre-tax contributions – employee and employer – of $2,400. The cap was implemented to help raise tax revenue to fund the ACA by limiting the tax benefits of FSAs. Beginning in 2014, the cap is subject to indexing based on the increase in Consumer Price Index for All Urban Consumers (CPI-U) each year. For 2016 the FSA cap is $2,550.
The 2017 cap is based on CPI-U through August 2016. With the release of the August CPI-U Xerox HR Services is projecting that the health FSA cap will increase to $2,600 for 2017. However, the IRS is not expected to formally release the 2017 FSA cap until late October – too late for most employers to include in their open enrollment this fall for 2017 benefits.
So what should employers do now until the formal IRS announcement is released? Some employers have already decided to increase the FSA cap to $2,600 for this upcoming open enrollment. Others have decided to wait until the formal announcement from the IRS later this year. Then they can decide whether to allow employees to increase their contribution the additional $50 before the beginning of the 2017 year. And some employers have decided to wait to implement the increase until 2018.
While the $50 increase in the cap is a relatively small amount, health FSAs are a valuable benefit for many employees and they may want to benefit from the additional contribution. Either way, when the IRS formally announces the increase later this year it will likely get wide visibility and employers can expect calls from some employees asking whether they can increase their contributions.