Employees can put an extra $50 into their health care flexible spending accounts (health FSAs) next year, the IRS announced on Nov. 6. But with open enrollment for the 2020 benefits year already under way, the increase may have come too late for some employees to take advantage of it.

Tax-exclusion limits for employer-sponsored commuting benefits and adoption assistance are also rising for 2020, the IRS announced.

"These annual increases to contribution limits help to ensure that health care FSAs, adoption assistance programs, and transit and parking programs remain attractive benefits to plan sponsors and participants," said Steve Grieco, CEO of ConnectYourCare, an employee benefits and health insurance broker.

The IRS seprately announced 2020 contribution limits for 401(k) and similar defined contribution plans and annual limit adjustments for defined benefit pension plans.

Health FSAs
For 2020, employees can contribute $2,750 to health FSAs, up from the 2019 limit of $2,700, the IRS said in Revenue Procedure 2019-44. The increase also applies to limited-purpose FSAs that are restricted to dental and vision care services, which can be used in tandem with health savings accounts (HSAs).

The chart below shows the adjustment in health FSA contribution limits for 2020.

 

Health Flexible Spending Accounts (includes limited-purpose FSAs)	2020	2019	2018
Maximum salary deferral contribution	$2,750	$2,700	$2,650
Source: IRS Revenue Procedure 2019-44.

As a reminder, an alert from ABD Insurance & Financial Services notes that "employer contributions (including non-cashable flex credits) generally cannot exceed $500 per plan year for the health FSA to maintain excepted benefit status. Nonexcepted health FSAs generally cannot comply with the ACA market reform mandates." Consequently, "in almost all cases" the maximum health FSA amount available for the 2020 plan year will be limited to $2,750 (the maximum employee salary contribution) plus $500 (a maximum employer contribution, if offered) for a combined annual total of $3,250.

A Late Notice
This year, the announcement comes as many employees are already selecting their benefits on enrollment platforms programmed with the 2019 health FSA limit.
The health FSA limit increase for 2019, which was also $50 over the prior year and announced on Nov. 15, 2018, left many employers deciding to stay with the previous year's limit. "Employers generally cannot wait until halfway through November to finalize their open enrollment information, and they generally do not want to rely on the expected changes," said Jay Kirschbaum, vice president of compliance services at Lockton Benefit Group, a benefits brokerage and advisory firm, about last year's changes. He observed that for 2019, most employers used $2,650, rather than the official 2019 limit of $2,700, as the maximum employees could contribute.
It's likely that for 2020 contributions, many employers may do likewise and simply keep the 2019 limit for another year.

"Print deadlines and benefit enrollment systems require earlier decision making by employers who host early fall enrollment," said Danielle Capilla, director of employee benefits compliance at Alera Group, a network of insurance and financial services firms. Like many employers and service providers, she expressed the hope that "in future years, the IRS will release contribution limits earlier, as many employers are eager to wrap up open enrollment in late October to early November."

The IRS released 2020 HSA contribution limits in May, giving employers and HSA administrators plenty of time to adjust their systems for the new year. The individual HSA contribution limit will be $3,550 (up from $3,500) and the family contribution limit will be $7,100 (up from $7,000).

 

Two FSA Extension Optons Since changes to the rules for health FSAs were introduced by the Treasury Department in 2013, there are two options for FSA extensions that employers can adopt: Carryover. If an FSA plan has the carryover feature, participants can roll over up to $500 of unused FSA dollars to the next year but will forfeit any excess over $500 at year-end. Grace period. An optional grace period gives employees an additional two-and-a-half months to incur new expenses using prior-year FSA funds. At the end of the grace period, all unspent funds must be forfeited. Plans can offer either the carryover feature or a grace period, but not both, or they can offer neither.

Dependent Care FSAs
A dependent care FSA is a pretax benefit account used to pay for dependent care services such as day care, preschool, summer camps and nonemployer-sponsored before or after school programs. Funds may be used for expenses relating to children under the age of 13 or incapable of self-care who live with the account holder more than half the year. 
The dependent care FSA maximum, which is set by statute and is not subject to inflation-related adjustments, is $5,000 a year for individuals or married couples filing jointly, or $2,500 for a married person filing separately. Married couples have a combined $5,000 limit, even if each has access to a separate dependent care FSA through his or her employer.

In addition, maximum contributions to a dependent FSA may not exceed these earned income limits:
 

• For single account holders, the earned income limit is their salary excluding contributions to their dependent care FSA.
   
• For married account holders, the earned income limit is the lesser of their salary excluding contributions to their dependent care FSA or their spouse's salary.

A separate tax code child and dependent care tax credit cannot be claimed for expenses paid through a dependent care FSA, as "double dipping" is not permitted.


Commuting Benefit Amounts
Revenue Procedure 2019-44 also included higher annual adjustments for qualified transportation and parking benefits, and for employer-funded adoption assistance programs, among other employee benefits.
Employer-funded parking and mass-transit subsidies are tax-exempt for employees. Using pretax income, employees can also pay their own mass-transit or workplace parking costs through an employer-sponsored salary deferral program.
These expenses include the value of mass-transit passes and van pooling services, and parking on or near the business worksite or a location from which employees commute to work by driving and then using mass transit.

 

Qualified Transportation Benefit Exclusion (monthly limits)	2020	2019	2018
Transit passes and van pool services	$270	$265	$260
Qualified parking	$270	$265	$260
Source: IRS Revenue Procedure 2019-44.

The increase in the transit benefit cap, though only an extra $60 per year, "should be welcomed by employees with high commuter costs, such as those who rely on urban mass transit systems," Capilla said. 
Employers, however, will see a more limited gain, because 2018 tax legislation eliminated the business deduction for qualified mass-transit and parking benefits.

"On its own, the lack of a tax deduction for employers may seem like a disadvantage to offering these benefits, although some employers would still need to do so to stay competitive and to comply with state and local laws," said Bobbi Kloss, HR leader at Benefit Advisors Network (BAN), a consortium of health and welfare benefit brokers.

Adoption Assistance
For 2020, the maximum amount of an employer subsidy for qualified child-adoption expenses that can be excluded from an employee's gross income is $14,300, up from $14,080 for 2019.
Excludable reimbursements must be "necessary and reasonable expenses" related to adopting a child, according to the IRS. Qualified adoption expenses, however, don't include expenses that employees pay to adopt their spouse's child.
The amount excludable from an employee's annual earnings begins to phase out for employees with modified adjusted gross income higher than $214,520 (up from $211,160 for 2019) and is completely phased out for those with modified adjusted gross income of $254,520 (up from $251,160 or more).

 

Adoption Benefits (Annual limits)	2020	2019	2018
Excludable amount	$14,300	$14,080	$13,810
Phase-out income thresholds:
Phase-out begins	$214,520	$211,160	$207,140
Phase-out complete	$254,520	$251,160	$247,140
Source: IRS Revenue Procedure 2019-44.

"Adoption benefits typically include some combination of financial assistance, information and referral services, and paid or unpaid leave," according to the Society for Human Resource Management's members-only toolkit Managing Adoption Assistance Benefits. "Adopting a child from foster care may cost about $2,500, domestic private adoptions can cost up to $40,000, and international adoptions can cost up to $30,000. Costs may include public or private agency fees, court costs, legal fees and counseling fees."
Employer programs can provide funds to reimburse adoption costs that exceed the annual limit, although employees will owe income taxes on any extra assistance they received.

Adoption Tax Credit vs. Employer Assistance
The tax code provides a separate income-tax credit for qualified adoption expenses. For 2020, the maximum credit is $14,300 per child—the same as the maximum nontaxable reimbursement by an employer's qualified adoption-assistance program—up from $14,080 per child in 2019. Tax credits larger than an employees' tax liability can be carried forward for up to five years.
Employees may take advantage of both the tax credit and the tax exclusion for employer reimbursements—but not for the same expenses.
Because employer-provided adoption aid is subject to FICA payroll taxes, some financial planners advise that high-income employees consider using the tax credit first, although employees who need upfront funds to pay expenses may benefit more from an employers' program.

This article provided by the Society for Human Resource Management (SHRM).