IRS Increases Section 125 Health FSA Carryover Limits for Plan Participants
The IRS has released Notice 2020-33, which increases the maximum amount of carryover for Section 125 Health FSA plan participants. Health FSAs under a Section 125 plan allow an employee to make pre-tax salary deductions from their paycheck to place into a medical account to use for certain qualified medical expenses (known as “salary reduction contributions”). This account is active for the plan year but, barring the carryover amount, any funds placed within it are forfeited once the plan year is over.
Previously, such plans have been required to only allow up to $500 of unused FSA funds to carry over from one plan year to the next. However, this IRS Notice changes this amount from $500 to the equivalent of 20% of the salary reduction contribution maximum for that plan year. For 2020, the maximum contribution is $2750: as a result, the carryover maximum for 2020 will be $550.
Section 125 plans must create a timely amendment to reflect the changes in the maximum carryover amount before the plan is allowed to implement the changes. Notice 2020-29 provides for extended plan amendment time during the 2020 calendar year, and that includes plan amendments for health FSAs. As a result, any amendment to change the maximum carryover amount for the 2020 plan year must be executed by December 31, 2021 (so long as all participants in the plan are notified of the change as soon as possible). For all subsequent plan years, the amendment must be made on or before the last day of the plan year.
You can read Notice 2020-33 HERE.