The IRS has announced an increase to the health care flexible spending account (FSA) contribution limits for the 2019 plan year. The 2019 FSA contribution level maximum will be $2,700.
Health care FSA contribution limits work on an individual basis. As a result, each spouse in the household may contribute up to the new FSA limit in the 2019 plan year.
This change applies only to salary reduction contributions under a health care FSA; it does not apply to employer-provided contributions, also referred to as flex credits.
Health Care FSA Limit Changes Over Time
As you can see in the graph above, the health care FSA maximums have often increased by $50 from year to year.
Additional Tax Exclusion Changes
In addition to the health care FSA limit change, the IRS also announced the following adjustments for taxable year 2019:
- Transit and parking employee benefits: Monthly limit on fringe benefit exclusion for transit and parking for 2019 was increased to $265 from the 2018 limit of $260.
- Retirement plans: The 2019 maximum contribution limit for employees contributing to a 401(k), 403(b) or 457 plan has been adjusted to $19,000, an increase of $500 from the 2018 limit.
- Adoption assistance programs: The maximum yearly exclusion for qualified adoption expenses in taxable year 2019 will be $ $14,080, up from $13,840 for 2018.
- QSEHRA: The maximum reimbursement for a qualified small employer health reimbursement arrangement (QSEHRA) for 2019 has been set to $5,150 for individual coverage and $10,450 for family coverage. QSEHRA limits for 2018 were $5,050 for individual coverage and $10,250 for family coverage.
Why are Health Care FSA Contribution Limits Adjusted?
The IRS will typically adjust FSA contribution limits annually to account for cost of living increases resulting from inflation.
As of September 2018, the Consumer Price Index (CPI) rose 2.3 percent (before seasonal adjustment) over the last 12 months, according to the U.S. Bureau of Labor Statistics. During that same time period, the unadjusted CPI for medical care services specifically rose 2 percent.
Defining and Changing Your FSA Contributions
Now that you know about the 2019 limit change, you may be asking, “When can I change my FSA contribution elections?” Or even, “When can I enroll in an FSA?”
If your employer’s cafeteria-style benefits plan includes a health care FSA, you will have the opportunity to enroll or re-enroll in the account and define how much you wish to contribute during your company’s open enrollment period.
As a reminder, after determining how much you wish to contribute to your health care FSA, these funds are available in full at the start of the plan year and are exempt from federal income and employment taxes (as well as state taxes in most states).
The contribution amount elected will typically be deducted in roughly equal amounts from your pre-tax earnings each pay period automatically.
When/if you can make a contribution change outside of open enrollment is determined by how the employer has designed the health care FSA as well as IRS rules
That being said, FSA participants can often adjust their contribution amount outside of open enrollment if they experience a qualifying life-changing event like marriage, the birth of a child, divorce, or death of a loved one covered by the FSA.
You cannot reduce your health care FSA contributions below what you have already been reimbursed. Consult your employer’s plan documentation or a member of your company’s HR department for details about when you may qualify to make health care FSA changes and how to do so.
Contribution Maximums Change at Employers’ Discretion
Keep in mind that the FSA maximum for 2019 defined by the IRS tells employers how much they can allow employees to contribute to an employer-sponsored FSA – not what they must allow. This is an important distinction, and one that we see cause confusion frequently.
Employers are not forced to apply the new limit to their FSA for the 2019 plan year, but they can choose to do so.
Why would an employer not elect to adjust their FSA’s maximum? There are a wide variety of reasons, but a common one is timing and logistics. If your company’s plan year begins in January, for example, it’s likely that your open enrollment period begins in an October/November timeframe and it may be unrealistic for HR to make a change immediately following the IRS’ announcement.
Coordinating open enrollment communications is a major undertaking for Human Resources teams, and trying to make last-minute revisions like adjusting FSA contribution limits and communicating those changes to employees can be a challenge.
Some companies will therefore elect to keep the previously planned limits in place for the upcoming plan year and revisit making an FSA contribution limit adjustment during open enrollment planning for the following year.
Long story short: Check your plan documentation or with your Human Resources department to get details about your FSA limits and other account details, such as the rollover and grace period features discussed below.
Considerations for FSAs with Rollover
Some FSAs offer a rollover feature, allowing account holders to “roll over” unused funds up to $500 from a previous plan year to a new plan year. Please consult your plan documentation or HR representative for exact details about your FSA’s rollover option.
If you have a health care FSA with rollover and your employer elects to increase FSA limits, here are answers to some questions you may be asking yourself:
How will rollover affect contribution limits? Carried over amounts do not count towards your contribution limit. In other words, you may still elect to contribute up to $2,700 in 2019 whether or not you roll over funds from 2018 – assuming, of course, that your employer elects to increase your plan’s limits (see section above).
If I choose not to elect an FSA in the 2019 plan year, will my unused FSA funds still rollover? Yes, even if you do not choose to contribute to an FSA in the new plan year, up to $500 can rollover from the previous plan year. The exact limit will be defined by your employer.
Am I able to rollover unused Dependent Care FSA funds? No. Per IRS regulations, the rollover feature is limited to health care FSAs; dependent care FSA funds may not be rolled over.
Considerations for FSAs with Grace Period
As an alternative to the rollover option mentioned above, employers have the option to establish a grace period for health care FSAs. A grace period is a set amount of time – up to two and a half months – in the new plan year during which the prior year’s health care FSA balance may be used.
If your company offers an FSA with a grace period, you may wish to keep this special account design feature in mind when making contribution decisions, knowing that you have additional time in which to use tax-free funds before they would be forfeited.
Maximums for Limited Purpose & Dependent Care FSAs
The 2019 contribution limit of $2,700 also applies to limited purpose FSAs (LPFSAs) – the result of pairing an HSA with an FSA. As a reminder, a limited purpose FSAs can only be used for qualifying dental and vision expenses until the medical plan deductible is met, at which time it converts to a health care FSA.
However, this new limit announcement does not apply to dependent care FSAs, which has a limit that is defined separately. For dependent care FSAs, you may contribute up to $5,000 per year if you are married and filing a joint return, or if you are a single parent. If you are married and filing separately, you may contribute up to $2,500 per year per parent.