IRS Issues 2021 Dependent Care FSA Increase Guidance and 2022 HSA Limits
By Brian Gilmore | Published May 11, 2021
Executive Summary
The IRS has issued guidance clarifying certain aspects of the American Rescue Plan Act of 2021 (ARPA) 2021 dependent care FSA limit increase and the annual HSA limit increases for 2022.
The full guidance is available here:
Dependent Care FSA Increase: https://www.irs.gov/pub/irs-drop/n-21-26.pdf
2022 HSA Annual Adjusted Amounts: https://www.irs.gov/pub/irs-drop/rp-21-25.pdf
Key Points:
Dependent care FSA carryovers and extended grace periods under the CAA FSA relief do not affect employees’ subsequent plan year election or income exclusion limits.
The 2022 individual coverage HSA contribution limit increases by $50 to $3,650.
The 2022 family coverage HSA contribution limit increases by $100 to $7,300.
Dependent Care FSA Increase Guidance
ARPA Dependent Care FSA Increase Overview
ARPA increased the dependent care FSA limit for calendar year 2021 to $10,500.
As with the standard rules, the limit is reduced to half of that amount ($5,250) for married individuals filing separately.
ARPA automatically sunsets the increased dependent care FSA limit at the end of 2021. Therefore, absent additional congressional action, the dependent care FSA limit will revert to $5,000 for the 2022 calendar year.
For full details, see our prior alert: Dependent Care FSA Increase Passes Congress.
CAA FSA Relief Overview
The new IRS guidance is directly related to the following aspects of the CAA FSA relief guidance previously issued by the IRS:
**Full FSA Carryovers from 2020-2021 and 2021-2022 Plan Years: **For both the health FSA and the dependent care FSA, the plan may permit carryovers of the full unused balance from plan years ending in 2020 and 2021 into the subsequent plan years ending in 2021 and 2022, respectively.
For both the health FSA and the dependent care FSA, the plan may have a 12-month grace period after the plan years ending in 2020 or 2021.
For full details, see our prior alert: Top Issues Resolved by IRS CAA FSA Relief Guidance.
New IRS ARPA Dependent Care FSA Increase Overview
Fortunately, the new IRS guidance is straightforward for any calendar plan year dependent care FSA that adopted the carryover or extended grace period provisions.
The new IRS guidance confirms two basic principles for such plans:
Amounts Available from Carryover or in Extended Grace Period Do Not Affect Subsequent Plan Year Election Limit
The new IRS guidance states that unused amounts carried over from prior year or available during an extended grace period are disregarded in determining the annual limit applicable for the following year.
Accordingly, employees can elect up to the full dependent care FSA limit applicable to the current plan year even if they are carrying over amounts from the prior plan year or have amounts available during an extended grace period from the plan year.
Example 1:
Employee elects $5,000 for the 2020 calendar plan year dependent care FSA but does not use any amount in the 2020 plan year.
Employer adopts the carryover provision that provides the $5,000 balance carries over into the 2021 plan year.
Employer also adopts the increased $10,500 dependent care FSA limit for 2021.
Result 1:
Employee can still elect to contribute $10,500 for the 2021 plan year.
This makes $15,500 available in the 2021 plan year ($5,000 carried over from 2020).
Although this was already clarified by the previous IRS guidance, the FSA TPA industry still largely did not feel comfortable moving forward on this basis until specifically addressed in post-ARPA guidance. The new IRS guidance fortunately provides that additional level of confirmation to conclusively put the issue to rest.
2**. Amounts Subject to the CAA Carryover or Extended Grace Period Do Not Affect Subsequent Year Income Exclusion Limit**
The new IRS guidance provides that amounts carried over from the prior plan year or available in a subsequent plan year pursuant to the extended grace period (i.e., either CAA FSA relief provision) remain eligible for exclusion from the employee’s income in the subsequent plan year.
Accordingly, employees can have the full amount of their dependent care FSA benefits excluded from income—even in excess of the appliable $10,500 or $5,000 calendar year limit—provided the excess amount available is attributable to the CAA carryover or extended grace period.
Example 2:
Employee elects $5,000 for the 2020 calendar plan year dependent care FSA but does not use any amount in the 2020 plan year.
Employer adopts the carryover provision that provides the employee’s $5,000 dependent care FSA balance carries over into the 2021 plan year.
Employer also adopts the increased $10,500 dependent care FSA limit for 2021.
Employee elects to contribute $10,500 to the dependent care FSA in 2021 plan year.
Employee incurs and is reimbursed for $15,500 in dependent care FSA expenses in the 2021 plan year.
Result 2:
The full $15,500 reimbursed by the dependent care FSA in the 2021 plan year is excluded from the employee’s income.
The amount reimbursed in 2021 in excess of $10,500 remains excluded from income because it is attributable to one of the CAA FSA relief provisions (the carryover).
Note that the analysis is more complex for a non-calendar plan year dependent care FSA. In that case, amounts available in a subsequent calendar year will be included in the employee’s gross income and wages if they are not attributable to one of the CAA FSA relief provisions (i.e., the carryover or the extended grace period). Employers can refer to Examples 2 and 3 in the guidance for more details on the application of this limitation for amounts reimbursed in a subsequent calendar year of a non-calendar plan year.
2022 Inflation Adjusted Amounts for HSAs
The IRS has released its annual update announcing the HSA contribution limit increases for 2022.
The 2022 HSA contribution limit for individual coverage will increase by $50 to $3,650.
The 2022 HSA contribution limit for family coverage (employee plus at least one other covered) will increase by $100 to $7,300.
The catch-up contribution limit of $1,000 is fixed by law and does not adjust for inflation.
The annual update also includes the 2022 calendar year minimum deductible and out-of-pocket maximums allowed for a plan to qualify as a high deductible health plan (HDHP)—the required coverage for an individual to be eligible to make or receive HSA contributions.
The 2022 minimum deductible for individual coverage will remain the same at $1,400.
The 2022 minimum deductible for family coverage will remain the same at $2,800.
The 2022 maximum out-of-pocket limit for individual coverage will increase by $50 to $7,050.
The 2022 maximum out-of-pocket limit for family coverage will increase by $100 to $14,100.
2022 Inflation Adjusted HSA Amounts
For more details on everything HSA, see our Newfront Go All the Way With HSA Guide.
Brian Gilmore
Lead Benefits Counsel, VP, Newfront
Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.
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