ALERT: Temporary changes to FSAs part of COVID relief bill

The provision provides further flexibility for taxpayers to rollover unused amounts in their health and dependent care FSAs from 2020 to 2021 and from 2021 to 2022…while also permitting employers to allow employees to make a 2021 mid-year change in contribution amounts.

Developing story; further analysis of the $900 billion stimulus package to follow.

Qualified transportation plan rules offer flexibility

Employers may wish to revisit their plan docs and make adjustments

This week, the IRS released an information letter (responding to an inquiry from a Member of Congress) in which the agency addresses options for minimizing benefit losses by participants who are no longer commuting, are commuting less frequently, or have changed their method of commuting due to the COVID-19 pandemic.

While the letter cautions that the regulations do not allow a refund of qualified transportation fringe benefits, it goes on to explain that:

• an employee is not precluded from rolling over unused transit benefit amounts to subsequent periods for future commuting expenses – so long as the participant has made a valid salary reduction election; and

• an employee may apply unused transit benefit amounts to another qualified transportation fringe benefit – to the extent that the other benefit is offered under the plan and the maximum monthly amount ($270 for 2020) for that benefit is not exceeded.

Note: An information letter provides general statements of well-defined law without applying them to a specific set of facts. They are furnished by the IRS in response to requests for general information by taxpayers, by Congress (on behalf of constituents), or by Congress (on their own behalf).


The Internal Revenue Service (IRS) recently announced the cost-of-living adjustments to the contribution and benefit limits for various employer-sponsored plans for 2021. Nearly all the dollar limits currently in effect for 2020 will remain the same, with only a few amounts experiencing minor increases for 2021.

The table below compares the dollar limits for certain employee benefit programs for 2020 and 2021.

401(k), 403(b) & 457(b) contributions$19,500$19,500
Catch-up contributions (age 50+)$6,500$6,500
Defined contribution plan (annual contributions)$57,000$58,000
Health FSA salary reduction$2,750$2,750
Health FSA carryover$500$550
Dependent Care FSA – married filing jointly or single parent$5,000$5,000
Dependent Care FSA – married filing separately$2,500$2,500
Excepted Benefit HRA$1,800$1,800
Qualified Small Employer HRA (QSEHRA) – self only $5,250$5,300
Qualified Small Employer HRA (QSEHRA) – family$10,600$10,700
HDHP: max. annual out-of-pocket (self only)$6,900$7,000
HDHP: max. annual out-of-pocket (family)$13,800$14,000
HDHP: min. annual deductible (self only)$1,400$1,400
HDHP: min. annual deductible (family)$2,800$2,800
HSA: annual contributions (self only)$3,550$3,600
HSA: annual contributions (family)$7,100$7,200
HSA: catch-up contributions (age 55+)$1,000$1,000
Qualified Transit and Parking – monthly$270$270

Details on these and other cost-of-living adjustments can be found in IRS Revenue Procedure 2020-45 and IRS Notice 2020-79.

President signs spending bill to avoid government shutdown

This week Congress passed a bipartisan appropriations package that will keep the federal government running through the next year. Folded into the sweeping legislation is a full, and permanent, repeal of the Affordable Care Act’s (ACA) Cadillac Tax. The nearly $1.4 trillion, two-part spending deal was signed by President Donald Trump just before the midnight Friday deadline.

Delayed repeatedly by Congress, the Cadillac Tax would have slapped a 40% levy on the value of employer-provided health benefits that exceed $11,200 for individual coverage and $30,100 for family policies. The idea was to reduce soaring health-care costs by discouraging employers from offering such generous plans.

Repeal of the tax – which had been postponed until 2022 – is projected to cost the federal government nearly $200 billion over 10 years, according to the Congressional Budget Office (CBO).

This positive development is welcome news, and caps off years of efforts by a broad range of stakeholders…including TASC, ECFC and the American Benefits Council.

Other policy changes incorporated into the year-end Continuing Resolution:

  1. The ACA’s medical device tax and so-called HIT tax on health insurance premiums were also repealed.
  2. Reauthorized funding for the Patient-Centered Outcomes Research Institute (PCORI) for another 10 years, thus requiring self-insured group health plans and health insurers to continue to pay fees to fund this institute until 2029. Under the ACA, these fees were originally set to sunset as of September 30, 2019.
  3. Relief from a tax reform provision that applied to tax exempt entities. Per the Tax Cuts and Jobs Act of 2017, tax-exempt entities were required to pay an unrelated business income tax (UBIT) on any qualified transportation fringe benefit provided to employees for which employers are not permitted to take a deduction.

House passes Small Business Health Fairness Act

Legislation aims to boost health insurance by expanding coverage and lowering costs for working families

In a bid to improve the health insurance purchasing clout of small businesses, House Republicans recently dusted off a piece of legislation more than a decade old as part of their on-going effort to repeal and replace the Affordable Care Act (ACA).*

The bill would allow the establishment of nationwide “association health plans” (AHPs) that could be offered by professional or trade groups, chambers of commerce, etc. Small businesses could buy coverage through these associations, theoretically gaining strength in numbers to enhance their bargaining leverage with insurers…leading to cheaper, better coverage and lower administrative costs for employers that face limited resources.**

Although the idea of association health plans is not a new concept, they often escaped close supervision because neither states nor the federal government had clear regulatory authority over them. So, Congress amended federal law to allow states to regulate these plans. With the passage of the ACA in 2010, the Obama administration required association health plans to meet a new set of small-group standards (i.e. the essential health benefits package).

This proposal has the potential to change/reverse that direction; it would eliminate most state regulation and put oversight – along with certification – in the hands of the Department of Labor. While certain requirements like the prohibition on lifetime and annual coverage limits would still apply, plans could offer stripped-down coverage and would have more latitude in setting premiums. What’s more, they could operate in multiple states and generally avoid state-mandated benefits and other state insurance rules.

H.R. 1101 now heads to the Senate, where its fate is uncertain.

* The earlier bill passed the House in 2003 but didn’t advance.

**Due to their size and economies of scale, large businesses have the ability to negotiate on behalf of employees for high-quality health care at more affordable costs. By offering a qualified group health plan under ERISA, these large employers are also exempt from a myriad of state rules and regulations.

2017 HSA Limits

Revenue Procedure 2016-28 essentially status-quo

Yesterday, the IRS provided the inflation adjusted deduction limitations for annual contributions made to a HSA under Section 223 of the Internal Revenue Code. These amounts are updated annually to reflect cost-of-living adjustments.  

Contribution Limits                                                                                                         Self-only coverage = $3,400 (an increase of $50)                                                    Family coverage = $6,750*

High Deductible Health Plan (HDHP)                                                                                A HDHP is defined as a health plan with an annual deductible not less than $1,300 for self-only coverage or $2,600 for family coverage, while annual out-of-pocket expenses may not exceed $6,550 (self-only) or $13,100 (family).*

*Unless noted, the amounts are unchanged and reflect current 2016 levels.


Hatch, Paulsen Introduce Bill to Enhance HSAs, FSAs

Legislation Aims to Ease the Burden of Rising Health Care Costs*

Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Ways and Means Committee member, Erik Paulsen (R-MN) recently introduced the Health Savings Act of 2016, which seeks to simplify and expand HSAs and FSAs.

Created to give Americans control over their personal health care spending, these plans have grown in popularity despite needing critical updates to match our changing health care system. For example, when HSAs were first made available back in 2003, these plans only covered 454,000 lives. Today, 19.7 million individuals are covered under a health plan that is HSA-eligible.

Among other things, the comprehensive legislation clarifies that individual employees’ contributions to HSAs and FSAs should not be counted toward the calculation of the Cadillac Excise Tax. Some additional highlights include:

HSA catch-up contributions (spouses)                                                             Current law allows HSA-eligible individuals age 55 or older to make additional catch-up contributions each year. However, the contributions must be deposited into separate HSA accounts even if both spouses are eligible to make catch-up contributions. This section would allow the spouse who is the HSA account holder to double their catch-up contribution to account for their eligible spouse. 

Prescription and Over-the-Counter Med. Allowance                                              The bill stipulates that a reimbursement of expenses incurred for any prescription or over-the-counter medicine or drug shall be treated as a reasonable medical expense. 

HSA Interaction                                                                                                      The HOPE Act of 2006** allowed employers that offered FSAs or HRAs to roll over unused funds to an HSA. However, unused FSA funds could not be rolled over to a HSA unless the employer offered a “grace period” (instead of the usual Dec. 31 “use or lose”). Furthermore, the amount to be rolled over was prohibited from exceeding the amount in said account as of Sept. 21, 2006 – effectively limiting most employees from accessing/utilizing these unused funds in order to help seed their HSAs. This section provides employers greater opportunity to roll-over funds from employees’ FSAs or HRAs to their HSAs in a future year in order to ease the transition.

TASC is dedicated to maintaining/expanding employee benefit programs on a tax-advantaged basis, and we applaud Congress’ recognition of the importance of enhancing access to health-based accounts. These tools provide a means of financing evolving health care needs and services, helping American families save for and manage their medical expenses. (Note: On average, FSA and HSA Participants are middle class families…meaning, they earn roughly $57,000 per year, which is less than 300% of the federal poverty level).

Full text of S. 2499 / H.R. 4469:            

*Health care costs are expected to rise by an average of 5.8% annually between now and 2024.

**Public Law 109-432

Obama’s Budget Proposal Tweaks Cadillac Tax

Administration’s outline also has a potential impact on Flex Plans

Last week, the Obama Administration released its (final) budget proposal for the 2017 fiscal year. And although presidential budgets are usually viewed as highly partisan documents, there are a few noteworthy provisions in this particular budget proposal that will be of interest to TASC Providers / Clients.

Cadillac Tax Changes                                                                                                   As ACA supporters attempt to ease the opposition toward this controversial policy item, which is unpopular with both political parties,* the administration is backing what they’ve dubbed “sensible improvements” in an effort to decrease the likelihood that employer plans will trigger the excise tax.

Health plan costs by geographic regions                                                                   Under the proposal, a health plan would be considered high cost and subject to the tax if it exceeded the greater of the current law threshold ($10,200 for individual coverage and $27,500 for family coverage) or a new “gold plan average premium” which would be determined/calculated and published for each state.** A family multiplier would be applied to this amount to create the family threshold. This reform is intended to protect employers from paying the tax only because they are in high-cost locales and ensure that the penalty remains targeted at the appropriate population (i.e. those with overly generous plans).

GAO study                                                                                                                     The President’s budget also requires that the Government Accountability Office (GAO) study the potential effects of the excise tax on entities with unusually sick employees…presumably leading to legislative measures if the study finds that such firms are adversely impacted.

FSA salary reduction                                                                                            Currently, each employee’s actual FSA salary reduction contribution is counted in determining whether the cost of coverage for that employee exceeds the limit and is subject to the excise tax. But under the new recommendations, employers would determine the average amount of FSA salary reduction contributions for similarly situated employees and use that average amount in determining the cost of coverage.

Elimination of Dependent Care FSAs                                                                          As part of the administration’s attempt to increase the child and dependent care tax credit and create a larger credit for taxpayers with children under the age of 5, dependent care FSAs would no longer be permitted.  The executive branch believes that the new credits would provide better assistance to families with children then is currently available through a dependent care FSA.

Of course, the budget request of a president in his final year in office – particularly one facing a hostile Congress – is unlikely to lead to enacted legislation. That said, this proposal at least offers an insight into some of the interesting options that the next president might pursue, depending on his/her political leanings.

Overall, these provisions simply fall short of the mark and do not address TASC’s core concerns; in fact, they seem to be just as – if not more – administratively complex than the rule it attempts to replace. While we appreciate recognition of the budget’s implicit acknowledgment that the excise tax is imposed inequitably on those who live in high-cost geographic areas, this adjustment completely disregards the other uncontrollable factors that are used to calculate the tax, as well as the detrimental effects the tax could have on employer-sponsored health care plans.

The Cadillac Tax does nothing to help reduce the cost of health care or improve its quality. Instead, it places unparalleled financial challenges on employers, siphoning off resources that otherwise could sustain or improve benefits for workers and their families. Therefore, TASC continues to support full repeal of the tax or at the very least a carve-out exempting contributions to FSAs, HRAs and HSAs from the tax’s calculation. 

* Clear bipartisan majorities of both the House and Senate have voted to repeal the tax, and ALL presidential hopefuls – including both Democratic candidates – have also publicly called for repeal.

** A “gold” level plan is a tier of coverage found on a state-based or federally-facilitated public marketplace; would be calculated based on a weighted average of the lowest cost (self-only) silver level plans, multiplied (by 8/7) to simulate the cost of an actuarially equivalent gold plan.

Compliance of Premium Reimbursement Arrangements

Earlier today, the Dept. of Labor issued additional FAQs (Part XXII) regarding implementation of PPACA. Specifically, the guidance addresses application of the market reform provisions on HRAs, certain health FSAs and other employer health care arrangements.

TASC Governmental Affairs is currently in the process of reviewing this latest release in order to assess the effect–if any–on our NESP/NEFSA Plan. We will communicate further on this topic in the near future.