On October 26, 2020, the Internal Revenue Service issued¹ the 2021 annual inflation adjustments for many tax provisions of the IRS Code. These adjusted amounts will be used to prepare tax year 2021 returns in 2022. Also on October 26, the IRS released2 the dollar limitations for qualified retirement plans for tax year 2021, including 401(k) plans.

Indexed Compensation Levels

As a reminder, for Healthcare FSAs that permit the carryover of unused amounts, the maximum carryover amount is increased to an amount equal to 20 percent of the maximum health FSA salary reduction contribution for that plan year. Accordingly, the maximum carryover amount from a plan year beginning in 2020 to be carried over to the immediately subsequent plan year beginning in 2021 is $550 (= $2,750 x 20 percent).3

While the $5,000/$2,500 DCAP limit has not changed, there are adjustments to some of the general tax limits that are relevant to the federal income tax savings under a DCAP. These include the 2021 tax rate tables, earned income credit amounts, and standard deduction amounts. The child tax credit limits are also relevant when calculating the federal income tax savings from claiming the dependent care tax credit (DCTC) versus participating in a DCAP.

The preceding general summary is intended to educate employers and plan sponsors on the potential effects of recent government guidance on employee benefit plans. This summary is not and should not be construed as legal or tax advice. The government’s guidance is complex and very fact specific. As always, we strongly encourage employers and plan sponsors to consult competent legal or benefits counsel for all guidance on how the actions apply in their circumstances.

Nothing in this communication is intended as legal, tax, financial or medical advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations. Always consult a professional when making life-changing decisions.

References:

1. https://www.irs.gov/pub/irs-drop/rp-20-45.pdf.
2. https://www.irs.gov/pub/irs-drop/n-20-79.pdf.
3. https://www.irs.gov/pub/irs-drop/n-20-23.pdf.
4. https://www.irs.gov/pub/irs-drop/rp-20-32.pdf.
5. https://www.irs.gov/pub/irs-drop/rp-20-43.pdf.
6. EBHRAs are only available for plan years beginning on or after January 1, 2020.

Jason Folks

214-596-7842 jasonf@healthequity.com

Jason Folks, CAS, CFCI, CHA, HSAe, is the director of Product Compliance with HealthEquity, Inc.  Folks has over 20 years of experience in regulatory compliance and employer consultation, with a particular focus on federal COBRA and state continuation requirements.   He attended New York University and holds COBRA Administration Specialist (CAS), Certified in Flexible Compensation Instruction (CFCI), Certified HIPAA Administrator (CHA), and Health Savings Account Expert (HSAe) designations through the Flexible Compensation Institute, LLC, a wholly-owned subsidiary of the Employers Council on Flexible Compensation.

Folks can be reached by telephone at 214-596-7842. Email: jasonf@healthequity.com.