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ACA Compliance Bulletin: Health FSA Limit Will Increase for 2020

Each year, as part of Affordable Care Act (ACA), the Internal Revenue Service (IRS) assesses the maximum amount that an individual can contribute to a Health Care Flexible Spending Account (HCFSA) and adjusts this amount for the cost of living.  On November 6, 2019, the IRS announced the HCFSA maximum will increase from $2,700 in 2019, to $2,750 for 2020.  No changes were made to the Dependent Care Flexible Spending Account (DCFSA) maximum contribution amount, which remains at $5,000.

Employers have the option to increase the maximum contribution for the HCFSA to the new 2020 maximum if they wish, but are not required.  Employers can set any dollar maximum they wish on a HCFSA, as long as they ensure that the account does not exceed $2,750 in pretax contributions in 2020. 

Additionally, for 2020, employers who are providing their employees the opportunity to enroll into a HCFSA can continue to offer a grace period or carry-over benefit for left over funds from the prior year.

  • A grace period allows employees to use any remaining funds left in their account from the prior plan year for claims incurred during the grace period, i.e. two and a half months after the start of the new plan year.
  • Example: If an employee has a remaining balance of $1,000 left in their HCFSA from 2019 into 2020 and has a procedure in February of 2020, that employee can use those left over funds to cover that expense.  However, if that procedure did not occur until April of 2020, the employee would only be able to use the funds contributed in 2020 for that claim, as the $1,000 would be forfeited as of March 15, 2020 after the grace period expired.
  • Carry-over allows employees to carry over up to $500 of unused funds from the prior year to the new plan year to use toward the new plan year’s claims.  The $500 is exempt from that year’s ACA maximum.
  • Example: If an employee has a remaining balance of $1,000 left in their HCFSA from 2019 into 2020, he/she would automatically be able to keep $500 of that amount to use for any claims in 2020 with no particular timeframe to be held to and without concerns of exceeding the ACA maximum amount. The additional $500 of the $1,000 that was remaining would be forfeited.

The attached ACA Compliance Bulletin provides a comprehensive overview of the ACA HCFSA maximums and details on how to remain within compliance for the 2020 plan year.

Read the full article.

Contact your Cowden representative for more information on this or other compliance issues.