The Internal Revenue Service (IRS) and Social Security Administration have released the cost-of-living (COLA) and inflation adjustments that apply to dollar limitations set forth in certain IRS Code Sections. The Consumer Price Index did not increase since the third quarter of last year and warranted no increase in most indexed figures for 2016.
Social Security and Medicare Wage Base
For 2016, the Social Security wage base is $118,500. The Social Security rate of 6.2 percent is applied to wages up to the maximum taxable amount for the year; the Medicare portion of 1.45 percent applies to all wages.
In addition, starting with the 2013 taxable year, individuals are liable for a 0.9 percent “Additional Medicare Tax” on all wages exceeding specific threshold amounts.
Indexed Compensation Levels
Highly compensated and key employee definitions:
| 2013 | 2014 | 2015 | 2016 | |
| Highly Compensated Employee | $115,000 | $115,000 | $120,000 | $120,000 |
| Top Paid Group of 20% | $115,000 | $115,000 | $120,000 | $120,000 |
| Key Employee, Officer | $165,000 | $170,000 | $170,000 | $170,000 |
401(k) Plans
In 2016 the maximum for elective deferrals is $18,000 and the catch-up contribution for those 50 or older is $6,000. That means if you are age 50 or over during the 2016 taxable year, you may generally defer up to $24,000 into your 401(k) plan.
Health Care FSA
We started tracking an additional indexed figure in 2013 for the annual limit for participant salary reductions for the health care flexible spending account (FSA). For plan years starting on or after January 1, 2016, the participant salary reduction amount to the cafeteria plan’s health care FSA portion of the plan may not exceed $2,550. However, this does not preclude employer contributions (as long as they are not convertible to cash) from being added to participants’ health care FSAs.
Adoption Credit
For 2016 this tax credit is $13,460. The credit starts to phase out at $201,920 of modified adjusted gross income (AGI) levels, and is completely phased out when modified AGI reaches $241,920.
The exclusion from income provided through an employer or a Section 125 cafeteria plan for adoption assistance also has a $13,460 limit for the 2016 taxable year. And remember–a participant may take the exclusion from income and the tax credit if enough expenses are incurred to support both programs separately.
Health Savings Account (HSA)
Minimum deductible amounts for the qualifying high-deductible health plan (HDHP) remained the same at $1,300 for self-only coverage and $2,600 for family coverage for 2016. Maximums for the HDHP out-of-pocket expenses increased to $6,550 for self-only coverage and $13,100 for family coverage for 2016.
Maximum contribution levels to an HSA for 2016 are $3,350 for self-only coverage and $6,750 for family coverage. The catch-up contribution allowed for those 55 and over is set at $1,000 for 2016. Remember, there are two requirements in order to fund an HSA: you must have qualifying HDHP coverage and no other impermissible coverage (such as coverage under another employer’s plan or from a health care flexible spending account that is not specifically compatible with an HSA).
Archer Medical Savings Account (MSA)
For high-deductible insurance plans that provide self-only coverage, the annual deductible amount must be at least $2,250 but not more than $3,350 for 2016. Total out-of-pocket expenses under plans that provide self only coverage cannot exceed $4,450. For plans that provide family coverage in 2016, the annual deductible amount must be at least $4,450 but not more than $6,700, with out-of-pocket expenses that do not exceed $8,150.
Although new MSAs are not allowed, maximum contributions to existing MSAs that are attributable to single-coverage plans is 65 percent of the deductible amount. Maximum contributions for family-coverage plans are limited to 75 percent of the deductible amount. MSA contributions must be coordinated with any HSA contributions for the taxable year and cannot exceed the HSA maximums.
Dependent and/or Child Daycare Expenses
Just a reminder that although the daycare expense limit associated with a cafeteria plan is not indexed, the tax credit available through a participant’s tax filing was raised in 2003. The daycare credit must be filed on Form 2441and attached to the 1040 tax filing form. Limits for daycare credit expenses are $3,000 of expenses covering one child and $6,000 for families with two or more children. If one of the parents is going to school full time or is incapable of self-care, the non-working spouse would be “deemed” as earning $250 per month for one qualifying child and $500 for two or more qualifying children. This “deemed” earned income is used whether a person is using the employer’s cafeteria plan or taking the daycare credit.
The cafeteria plan daycare contribution limit is $5,000 for a married couple filing a joint return, or for a single parent filing as “Head of Household.” For a married couple filing separate returns, the limit is $2,500 each. The daycare credit is reduced dollar for dollar by contributions to or benefits received from an employer’s cafeteria plan. An employee may participate in their employer’s cafeteria plan and take a portion of the daycare expenses through the credit if they have sufficient expenses in excess of their cafeteria plan annual election, but within the tax credit limits.
Commuter Accounts
For 2016 the monthly parking amount is $255. The 2016 monthly limit for transit remains the same at $130.
Long Term Care
For a qualified long term care insurance policy, the maximum non-taxable payment increases to $340 per day for 2016.
Finally, by participating in a cafeteria plan, the participant will be lowering their income for the Earned Income Tax Credit (EITC). Check out the new limits in IRS Publication 596 “Earned Income Credit” and for more information about this tax credit.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
