The Internal Revenue Service announced 2022 tax year annual inflation adjustments in Revenue Procedure 2021-45. Sponsors of calendar-year health flexible spending account plans had been waiting for guidance on 2022 contribution limits in order to prepare for open enrollment.
For plan years beginning in 2022, the dollar limit on employee salary reduction contributions to a health flexible spending account will increase to $2,850, which is a $100 increase over the 2021 amount. Health FSAs that permit the carryover of unused amounts from one year to the next may set a maximum carryover amount of $570 for the 2022 plan year. This is an increase of $20 from the regular 2021 carryover limit.
The dollar limit on employee salary reduction contributions to a dependent day care flexible spending account is not adjusted for inflation and the guidance did not extend the one-year 2021 increase to the dependent care FSA limit. Therefore, the dollar limit on employee salary reduction contributions to a dependent day care flexible spending account will once again be $5,000 ($2,500 if married filing separately) for the 2022 plan year.
Employers sponsoring FSAs may question how the new inflation adjustment interacts with COVID-19 pandemic relief issued by the IRS in 2020 and 2021.
A health FSA may be structured with a “grace period” feature allowing a participant to continue to incur claims up to 2-1/2 months after the end of the plan year and be reimbursed with the prior year’s contributions. Alternatively, a health FSA may be structured with a “carryover” feature allowing a participant to carry unused amounts to the next plan year, up to the IRS limit. A plan may include a grace period or a carryover feature, but not both, but this restriction was changed temporarily during the COVID-19 pandemic.
Pandemic guidance allowed employers to amend their flexible spending account plans to incorporate the following changes. These changes were permitted, but not required:
- Increase Carryover for 2020. Dependent Care FSAs and Health Care FSAs with plan years ending in 2020 could be amended to allow a carryover of all unused contributions into the 2021 plan year.
- Increase Carryover for 2021. Dependent Care FSAs and Health Care FSAs with plan years ending in 2021 could be amended to allow a carryover of all unused contributions into the 2022 plan year.
- Extend Grace Period. Dependent Care FSAs and Health Care FSAs with plan years ending in 2020 or 2021 could extend a grace period to 12 months following the end of the plan year (an increase from 2-1/2 months).
The inflation adjustments do not change these permitted COVID-19 pandemic relief permitted plan design changes. Those changes, which were temporary and if adopted, applied only for the 2020 and 2021 plan years.
The inflation adjustment of limiting Health FSA contributions to $2,850 and limiting the carryover to $570 apply to plan years starting in 2022.
A copy of the IRS notice may be accessed by clicking here.